Investors suffered through the worst day of the year for stocks as fears heated up over the elections in Italy for prime minister, and what that means for the global economy.
The Dow Jones industrial average tumbled 216.40 points to 13,784.17, the Standard & Poor's 500 lost 27.75 points to 1487.85 and the Nasdaq composite index fell 45.57 points to 3116.25.
The so-called "fear index" rose 35% to 19.18, its biggest one-day percentage jump since August 2011. The index is a measure of stock volatility traded on the Chicago Board of Options Exchange.
Based on preliminary reads on the Italian elections, Silvio Berlusconi may have done better than expected and blocked victory to Pier Luigi Bersani. Bersani, who had been leading in the polls, was expected to keep the strict budget rules of former Prime Minister Mario Monti. The uncertainly leaves in question how this critical European nation will shift its fiscal policy.
Randy Frederick, managing director of active trading and derivatives at Charles Schwab, blamed the drop on a combination of renewed political risk in Italy, the coming budget cuts in Washington Friday and a market that has run into resistance at big round numbers, such as 1500 on the Standard & Poor's 500 stock index.
"The politics in Italy are complicated," says Frederick, referring to the elections in the debt-strapped eurozone country today. "The market is worried because the election has resulted in unknowns as it relates to the country's budget reforms.
Others said investors are nervous about what Federal Reserve Chair Ben Bernanke might say in testimony Tuesday before a congressional committee on Capitol Hill.
The Dow Jones industrial average briefly traded less than 83 points below its all-time record closing high of 14,164.53, which was set Oct. 9, 2007. But the Dow closed 171 points lower at 13,829, according to preliminary results. The Standard & Poor's 500 index fell 22 points to 1,493. The tech-heavy Nasdaq composite index declined 35 points to 3,126.
Despite a looming showdown in Washington over a fast approaching mandated budget-cut deadline, the Dow and the S&P 500 had been up 0.5%; the Nasdaq 100 had been up 0.8%.
Gains evaporated after another poll showed that Italy's elections appear to be heading toward gridlock. Stocks slumped last year on concern that Italy would become engulfed in the European government debt crisis.
"The Italian elections have implications for the credit markets," said Quincy Krosby, chief market strategist at Prudential. "The ultimate worry is that the credit markets start reacting."
Investors sold Italian government bonds and erased most of an early rally in Italy's stock market as the camp led by former premier Berlusconi appeared more likely to take control of Italy's Senate, threatening the country's reform efforts.
The yield on Italy's 10-year government bond edged up to 4.43% from 4.40%. The country's benchmark stock index, the FSTE MIB, rose 0.7%, giving up an early gain of 4%.
Investors worry about the outcome of Italy's election because it could set off another crisis of confidence in the region's shared currency, the euro. Financial markets in both Europe and the U.S. have swooned at the prospect of Italy or Spain being dragged into the region's government debt troubles, which have led to bailouts of Greece, Ireland and Portugal.
On the New York Stock Exchange, Barnes & Noble (BKS) rose 11% after founder and chairman Leonard Riggio told the bookseller he is going to try to buy the company's retail business. Hertz (HTZ) advanced 3% to $19.36, despite posting a fourth-quarter loss, after the rental car company said that pricing improved, volume rose and it cut costs.
Fed chairman Bernanke will testify before the U.S. Senate's banking committee Tuesday and again before Congress on Wednesday. Investors will watch to see if he gives any further indications about how long the central bank intends to keep providing stimulus to the economy.
Several reports about consumer confidence and the housing market, scheduled to be published Tuesday, will give investors more information about the state of the economy. Optimism that the housing market is maintaining its recovery have helped underpin a rally in stocks this year.
Many analysts say the Fed's bond-buying program and the resulting low interest rates have been a big driver behind this year's stock rally. The Dow has gained 6.3% this year and the S&P 500 5.6%, pushing both near record levels. The Dow's record close is 14,164, reaching in October 2007 and the S&P closed as high as 1,565 in the same month.
The yield on the 10-year U.S. Treasury bond fell sharply to 1.93% from 2% at the start of trading Monday. Gold prices were staging somewhat of a comeback after losing ground last week. The price of gold was up 1% to over $1,588 an ounce. In currency trading, the euro was 0.1% weaker against the dollar at 1.317; the dollar was gaining against the yen, up 0.4% at 93.40.
In energy markets, benchmark crude for April delivery had surged more than 1% to over $94 a barrel early in the trading session. In afternoon trading, the price was up 0.3% to about $93.50 a barrel in electronic trading on the New York Mercantile Exchange. The contract rose 29 cents to $93.13 on Friday.
Stocks closed out Friday on a high note, breaking a two-day slump. The Dow finished up 119.95 points or 0.86% to 14,000.57; the S&P 500 was up 13.18 points or 0.88% to 1,515.60; the Nasdaq closed 30.33 points, or 0.97%, higher to 3,161.82.
In Europe, key stock indexes ended higher Monday. Britain FTSE 100 closed up 1% at 6,355.37. Germany's DAX 30 index finished up 1.5% to 7,773.19. France's CAC 40 index ended up 0.4% at 3,721.33. Investors appeared unmoved by Friday's news that Moody's Investors Service downgraded the U.K.'s sovereign credit rating. But they seemed increasingly concerned about the outcome of prime minister elections in Italy. Early results that indicated Silvio Berlusconi, a former prime minister, might have gained a plurality of the votes could upset plans for fiscal reforms in the eurozone's third-largest economy.
On Monday, Japanese stocks led Asian markets higher, jumping on a report that the prime minister's pick for the next central bank governor will be a strong advocate of loose monetary policy aimed at reviving the moribund economy.
The benchmark Nikkei 225 gained 2.4% to 11,662.52 and the yen dropped against the dollar after Kyodo News, citing several unnamed government sources, reported that Prime Minister Shinzo Abe is preparing to nominate Haruhiko Kuroda as the next governor of the Bank of Japan.