Stocks dropped on Tuesday as investors worried that rising oil prices could choke off the economic recovery, with equities looking to keep taking their lead from oil prices in the near term.
U.S. Federal Reserve Chairman Ben Bernanke said the recent surge in oil prices was unlikely to derail the economy, but his comments did little to reassure investors worried that turmoil in the Middle East could hit Saudi Arabia, the world's largest oil exporter.
All eyes continue to be on turmoil in the Middle East, said Michael Sheldon, chief market strategist at RDM Financial in Westport, Connecticut. The million-dollar question remains what happens to Saudi Arabia.
The Dow Jones industrial average <.DJI> dropped 76.25 points, or 0.62 percent, to 12,150.09. The Standard & Poor's 500 Index <.SPX> fell 10.56 points, or 0.80 percent, to 1,316.66. The Nasdaq Composite Index <.IXIC> lost 26.54 points, or 0.95 percent, to 2,755.73.
The U.S. manufacturing sector grew in February at its fastest rate since May 2004 in another sign the world's largest economy continued to recover, helping put a floor under stock prices.
There were signs of a defensive stance in the market as cyclical sectors experienced the biggest losses, while defensive sectors such as utilities, healthcare and consumer staples -- which do better in times of uncertainty -- gained.
The S&P's consumer staples index <.GSPS> rose 0.12 percent, while materials <.GSPM> was off 1.3 percent and financials <.GSPF> fell 1.2 percent.
Consumer staples Wal-Mart Stores Inc and Coca-Cola Co helped shield the Dow. Wal-Mart rose 0.8 percent to $52.41, while Coca-Cola was up 1.9 percent to $65.12.
Stocks have taken their cue from oil since the start of turmoil in the Middle East and North Africa in January. The S&P had its weakest performance since November last week, but still had tallied three months of gains.
We are continuing to focus heavily on what's happening to oil prices and oil supply, said Joe Battipaglia, market strategist at Stifel Nicolaus in Yardley, Pennsylvania.
A further spike in oil would cause a stalling out of economic activity globally and margin pressures for corporations, he said.
U.S. crude oil futures rose 1.4 percent to $98.41.
In testimony to the Senate Banking Committee, Bernanke said higher oil prices were unlikely to have a big impact on the U.S. economy, but could lead to weaker growth if sustained.
For the past seven months, stocks have risen on the first day of the month, with the S&P rising 3.2 percent in February.
(Additional reporting by Rodrigo Campos; editing by Jeffrey Benkoe)