Stocks Extend Losses on Growth Worries

Stocks extended their losses and bonds rallied after a weaker-than-expected reading on U.S. manufacturing activity added to investor concerns about the pace of global economic growth.

The moves in U.S. trading followed weakness in European stocks amid continuing anxiety over emerging markets.

In the Markets

Dollar | Treasurys | Gold | Oil

Investors Brace for Bumpy Ride in 2014

E.S. Browning: Most Expect Turmoil to Pass

Safe Havens Regain Appeal

ISM Miss Is Ugly All Around

The Dow Jones Industrial Average was down 242 points, or 1.6%, to 15457 in midday trading. The S&P 500 shed 30 points, or 1.7%, to 1753. The Nasdaq Composite Index declined 81 points, or 2%, to 4023.

The S&P 500 is down more than 5% from its Jan. 15 record close of 1848.38.

Monday's selling was touched off by a report from the Institute for Supply Management showing its manufacturing purchasing managers index for January slumped to a reading of 51.3. The metric missed a projected 56 and marked a drop from December's 56.5.

Ahead of Friday's data on January employment, the ISM report added to questions about the strength of the economy after December's jobs report was much weaker than expected. Investors have been more sensitive to negative economic readings this year now that the Federal Reserve is removing its support for stocks as it winds down its stimulus measures, said Keith Bliss, senior vice president at Cuttone & Co.

"There has been a discernible change in behavior in the market from last year," he said. "You didn't have to be real smart in 2013 to make money. You just didn't want to get in the way of the Federal Reserve. The behavior change now is people are absolutely paying attention to fundamentals."

Tom Carter, managing director at JonesTrading, said those selling on Monday included large "plain vanilla" mutual funds.

"People are still taking profits off the table, waiting to reinvest," he said. "It's safe to say people are taking advantage of these levels and take some profits and put them in the bank, either to redeploy or wait."

Despite the recent losses, several investors continued to cast the recent decline in stocks as a healthy pullback following a virtually uninterrupted gain last year. Many market participants have said that a so-called correction -- viewed as a decline of 10% -- wouldn't be unusual early in the year, especially given that much of last year's gains came on the back of rising stock valuations.

"You had a lot of people who felt that they almost had to be dragged along with the indices last year," said Jack Caffrey, equity portfolio manager for J.P. Morgan Private Bank, which oversees about $977 billion. "For people who were a little bit skittish and looking for reasons to doubt the market, they found some support in that [ISM] data."

Mr. Caffrey said he continues to favor cyclical stocks expected to benefit from the steadily improving U.S. economy, such as the consumer discretionary sector.

Investors will be paying close attention to Friday's nonfarm payrolls report for January to see if December's slowdown in hiring persisted for last month, as well as for possible revisions to December's weak number. Economists estimate that employers added 183,000 jobs last month, according to a Wall Street Journal forecast.

The weak ISM data sparked fresh gains in Treasury prices, sending yields lower as the trading session went on. The 10-year note was recently yielding 2.604%. The flight into Treasury bonds amid turmoil in developing nations sent the 10-year yield down by more than 0.3 percentage point last month, the biggest monthly decline since August 2011.

Gold futures shot higher, benefiting from renewed interest in the metal as a safe haven.

With stock markets in correction mode, "gold regains some importance as [a] portfolio necessity," said George Gero, a vice president and metals strategist with RBC Capital Markets.

Gold for April delivery, the most actively traded contract, recently traded up $22.40, or 1.8%, at $1,262.20 a troy ounce on the Comex division of the New York Mercantile Exchange. Gold had traded at about $1,248 an ounce ahead of the ISM data.

Investors remain on edge about the health of emerging markets following some weak economic readings and a selloff in overseas currencies. The concern has translated to wariness of risky investments such as stocks so far in 2014, with the S&P 500 off about 5% so far this year. Safe-haven plays like Treasurys have rallied.

"The markets are still vulnerable," said Colin Cieszynski, senior market analyst at brokerage at CMC. "We need a retrenchment in the [U.S.] market, so I wouldn't be surprised to see a decline of 10% or so."

Among emerging-market currencies, the Turkish lira was little changed and the South African rand and Hungarian forint rose slightly against the dollar. But equities remained weak, with the iShares MSCI Emerging Markets exchange-traded fund falling 2.3%.

In addition, auto makers have been releasing monthly sales data throughout the session. General Motors and Ford Motor fell.

European markets were lower following some disappointing earnings from the banking sector. The Stoxx Europe 600 was down 1.3%, after snapping a four-month losing streak in January. Banks saw the heaviest losses. Poorly received updates from the U.K.'s Lloyds Banking Group and Switzerland's Julius Baer dragged on that sector. That offset data showing the euro zone's manufacturers expanded at a slightly faster rate in January.

Overnight, Asian shares fell following the latest official data for the Chinese manufacturing sector, which indicated a modest slowdown in January. Japan's Nikkei Stock Average shed 2% as a stronger yen weighed on exporter shares. Chinese markets were closed for the Lunar New Year holiday.

In other early stock movers, Jos. A. Bank Clothiers slumped after The Wall Street Journal reported that the apparel retailer has entered into talks to buy Eddie Bauer, as it looks to fend off a proposed takeover by Men's Wearhouse.

Pfizer was the only Dow component in positive territory after the drug maker announced positive results of a trial of its advanced breast cancer treatment.

Herbalife lost early gains after boosting its fourth-quarter outlook and announcing plans to offer $1 billion in convertible debt to fund the repurchase of its common stock.