More signs of distress in China's economy and rising bond yields led to a broad sell-off in stocks Monday, leaving key market indexes down more than 5 percent from their record highs last month.
It was the first 5 percent decline -- referred to on Wall Street as a "pullback" -- since November.
Pullbacks that occur during bull markets tend to be "nasty and brutish" -- but short, said John Manley, chief equity strategist at Wells Fargo Funds Management. He said it's common to get declines of 3 percent to 7 percent "as the market restores a reverence to risk to the investing public."
U.S. trading started with a slump Monday. The market recovered much of its loss, then fell back again. By the close of trading the big stock indexes were clinging to modest gains for the second quarter, which ends Friday.
Before Wall Street opened for trading on Monday, Asian markets were already sharply lower, led by a 5 percent plunge in China's Shanghai Composite Index. That was the index's biggest loss in four years. The decline was prompted by a government crackdown on off-balance sheet lending, which made investors worry about China's economic growth.
U.S. traders took one look at that and started dumping stocks. The Dow Jones industrial average fell as much as 248 points in the first hour of trading. Stocks got closer to break-even around midday before falling again in the last hour. The Dow finished down 139.84 points, or 0.
All 10 industry groups in the S&P 500 fell. The biggest drop was 1.8 percent for bank and financial stocks. Bank of America fell the most among major bank stocks, giving up 39 cents, or 3.1 percent, to $12.30.
The S&P 500 is down 5.7 percent from its all-time of 1,669 on May 21. The Nasdaq has fallen 5.2 from its own recent high on that day.
Markets remain vulnerable to any comments from the Federal Reserve about its $85 billion in monthly bond purchases, which have kept interest rates at historic lows and helped drive the stock market's rally the last four years. On Wednesday and Thursday, the S&P plunged 3.9 percent after the central bank said its bond-buying program could wrap up by the middle of next year as long the economy continues to improve. Stocks edged up Friday, but still had their worst week in two months.
"I think investors are overreacting to the prospects of a change in Fed policy," said Gary Thayer, chief macro strategist for Wells Fargo Advisors. He noted that unemployment is down, inflation is low. "These are good economic conditions."