The Dow Jones industrial average (search) dropped 68.73 points, or 0.67 percent, to 10,171.56, its lowest close since May 26. The Standard & Poor's 500 Index (search) dropped 9.23 points, or 0.83 percent, to 1,109.10, and the technology-laced Nasdaq Composite Index (search) dropped 30.76 points, or 1.56 percent, to 1,935.32, both ending at their lowest levels since May 24.
In a sign that consumer spending may be weakening, many retailers reported disappointing June sales, which fanned Wall Street's fears about the economy and hit shares of retailers like Wal-Mart Stores Inc. (WMT) and Target Corp. (TGT). Consumer spending is the biggest catalyst in the economy.
Yahoo! Inc.'s earnings report, which disappointed investors due to a lower-than-expected outlook, helped drive tech stocks lower.
The retail reports and disappointing earnings overshadowed good news about jobs. The number of first-time jobless claims fell to a three-year low and came in better than analysts expected. However, the creation of jobs still remains an issue after last week's disappointing payroll report for June. The light volume in Thursday's trading showed many investors were keeping to the sidelines.
"You look at the retail report, job creation, interest rates, whatever, and it creates this drab, uninspiring backdrop for the market that makes it harder to commit any money right now," said Jeff Kleintop, chief investment strategist for PNC Financial Services Group. "Volume is very light, but that's not a sign of complacency. It's a sign that investors are paralyzed by all these background issues."
However, some analysts were happy that despite the bad news — which also included oil prices topping $40 a barrel and new warnings of terror threats in the United States — the market's losses weren't greater.
"Considering all the bad news out on the tape today, things could be worse. You can't really point to a lot of good news out there right now," said Bryan Piskorowski, market analyst at Wachovia Securities. "It's ugly, but it looks like the market's trying to hold tight and wait for those second quarter earnings results."
An influx of bargain hunters kept the major indexes from further losses, with a handful of investors looking past the current uncertainty in favor of focusing on economic fundamentals, analysts said. And with the market's recent losses, some stocks were attractively priced for those with a high tolerance for risk.
"The market's been somewhat oversold over the past few days, particularly in semiconductors and pharmaceuticals," said Michael Sheldon, chief market strategist at Spencer Clarke LLC. "When you look at it, the economy's still doing well, productivity is high and interest rates are still very accommodative. So there's reason to be somewhat optimistic."
Underpinning the market was strength in drug stocks like Johnson & Johnson and Pfizer Inc. , as investors fed money into companies viewed as less risky in an uncertain economic environment.
"Clearly, we're seeing a little bit of rotation away from the Nasdaq area and into the safer areas." said Evan Olsen, head of equity trading at Stephens Inc.
Wal-Mart (WMT), the nation's largest retailer, said its same-store sales — sales in individual stores open more than a year — climbed 2.2 percent in June, far from the 3.6 percent analysts had expected. Rival Target Corp.'s (TGT) sales were similarly disappointing. Wal-Mart slipped 14 cents to $52.18, while Target fell 69 cents to $40.80.
J.C. Penney Co. (JCP) gained $1.91 to $38.12 after the clothing retailer surpassed most other retailers and reported stronger June sales.
Investors hoping for a strong second-quarter earnings season were not cheered by the retail reports, especially after warnings and bearish outlooks in the technology sector. Yahoo! slid $2.52 to $30.08 one day after its earnings came out. While the current quarter was in line with Wall Street expectations, investors expected a better outlook for future quarters.
Siebel Wednesday warned its second-quarter revenue would come in below expectations as customers delayed buying at the end of the quarter. Siebel dropped $1.18, or 12.9 percent to $8.03.
Dow component Alcoa Inc. (AA) fell 22 cents to $32.55 after reporting earnings late Wednesday that were a penny shy of analysts' estimates.
Big pharmaceutical stocks were getting a boost as promising new drug launches and fading fears about drug reimportation lured investors back to the sector, analysts said.
The Russell 2000 index of smaller companies was down 11.32, or 2 percent, at 560.71.
Overseas, Japan's Nikkei stock average fell 0.6 percent. In Europe, Britain's FTSE 100 closed up 0.5 percent,France's CAC-40 rose 0.3 percent for the session and Germany's DAX index gained 0.1 percent.
Reuters and the Associated Press contributed to this report.