Stocks Stomped by Fed Fallout, Spain Worries

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NEW YORK ( TheStreet) -- U.S. stocks were stomped Wednesday, weighed down by diminished hopes for additional stimulus from the Federal Reserve and the prospect of more debt problems surfacing in Europe.

The sell-off extended Tuesday's losses, getting the second quarter off to a rough start after a stellar beginning to the year. On Wednesday, a poor Spanish debt auction rekindled concerns about the health of the eurozone, adding to Wall Street's worries after the minutes of the latest Fed meeting, released on Tuesday, put a dent in expectations the central bank had another round of quantitative easing up its sleeve.

The Dow Jones Industrial Average dropped 125 points, or 1%, to close at 13,075. The blue-chip index ranged as low as 13,021 earlier in the session.

Breadth within the Dow was overwhelmingly negative with 26 of the index's 30 components finishing lower. The biggest percentage losers among the blue chips were Alcoa(AA) , Bank of America (BAC) , Cisco(CSCO) , JPMorgan Chase (JPM) and Microsoft(MSFT) ; all of which lost at least 2%.

AT&T(T) , Caterpillar(CAT) , Merck(MRK) and Procter & Gamble (PG) were the only blue-chip stocks that finished in the green.

The S&P 500 shed 14.4 points, or 1%, to finish at 1399, closing below 1400 for the first time since March 23. The Nasdaq took the worst hit of all, sinking 45.4 points, or 1.5%, to settle at 3068.

Quincy Krosby, a market strategist for Prudential Financial, says it's very normal for stocks to start pulling back after such a strong run-up while waiting for the next catalyst.

"The market needed a reason to pullback and took advantage of worries about the Spanish economy and Spanish debt and Fed minutes," Krosby said.

"Despite the headline-grabbing nature of Spanish debt, it's still very much contained in Europe," she said, adding that she believes the market's weakness following the latest Fed minutes has been a knee-jerk reaction by traders, rather than long-term investors.

The next real driver for the market, says Krosby, is first-quarter earnings season, which kicks into gear next week. Krosby cautions that top-line revenue growth could be challenged, and investors are going to be looking critically at margins and corporate guidance at a time when Europe is weak and China is in the midst of a slowdown.

The strategist will also want to see if Friday's nonfarm payrolls report points to an expanding work week, which would help clarify whether the economy is improving and demands more workers.

From a big-picture perspective, Krosby believes stock market can do "very well" with modest growth of 1.5%-2% in gross domestic product.

U.S. stocks tumbled Tuesday after the Federal Reserve downplayed the prospects for more quantitative easing. Tuesday's Fed minutes struck a measured tone about the prospect of more bond buying with the central bank saying it was "prepared to adjust the size and composition of its securities holdings as appropriate to promote a stronger economic recovery in a context of price stability."