- Associated Press - Wednesday, April 3, 2013

NEW YORK (AP) — Weak reports on hiring and growth at service companies dampened investor optimism on the U.S. economy Wednesday, putting the Dow Jones industrial average on track for its worst day in more than a month.

The Dow was down 98 points, or 0.7 percent, to 14,561 as of 2:23 p.m. EDT. The Standard & Poor’s 500 index dropped 15 points, or 1 percent, to 1,554. Both indexes closed at record highs on Tuesday.

The stock market started 2013 with a rally as investors became more optimistic about the U.S. economy, especially housing and jobs. The reports Wednesday disappointed the market and came two days after news that U.S. manufacturing growth slowed unexpectedly last month.

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“The economic data, which has been stronger than expected throughout most of the first quarter, may just be in for a little bit of a soft patch,” said Stephen Parker, a portfolio manager at JPMorgan Private Bank. “But I think that’s temporary.”

The losses were widespread. All 10 industry groups in the S&P 500 index fell. Utilities, which investors tend to buy when they want to play it safe, fell the least, giving up just 0.2 percent. Energy and bank stocks had the worst losses, 1.7 percent.

Signs of investor skittishness increased.

The yield on the 10-year Treasury note fell sharply, to 1.80 percent from 1.86 percent, the lowest level for the benchmark rate since January. The decline means investors are moving money into low-risk U.S. government debt.

The Russell 2000 index, which tracks small-company stocks, fell for a third straight day, dropping 1.5 percent. It’s now down 3.3 percent so far this week, far worse than the declines in the Dow, 0.1 percent, and the S&P, 0.9 percent. That’s another signal that investors may be becoming more bearish about the U.S. economy.

Small-company stocks, which outperformed both the Dow and the S&P 500 in the first three months of the year, are more sensitive to the outlook for the U.S. economy than the larger S&P 500 companies. That’s because they rely far more on domestic sales than global giants such as IBM and Caterpillar, which sells heavy machinery and construction equipment around the globe.

U.S. service companies kept growing at a solid pace in March, but the expansion was less than economists were expecting. The Institute for Supply Management’s index of service companies fell to 54.4 from 56 a month earlier. The report was the weakest in seven months and fell short of what analysts were expecting.

Separately, payrolls processor ADP reported that U.S. employers added 158,000 jobs last month, down from February’s gain of 237,000, as construction firms held off on hiring. The ADP report often is seen as a preview for the government’s broader survey on employment, which is due out Friday.

In other trading, the Nasdaq composite fell 39 points, or 1.2 percent to 3,215.

The Dow Jones transportation average, an index of 20 stocks including airlines such as Delta and freight companies FedEx and UPS, fell for a third straight day. The index, which is regarded as a leading indicator for broader market indexes as well as the economy, has fallen 3.6 percent this week, after surging 17.9 percent in the first quarter of the year.

“The strength that we’ve seen in transports over the last three months has been encouraging,” said JPMorgan’s Mr. Parker. “That’s certainly one area we will be watching closely to see if there’s a shift in sentiment going forward.”

Even though stocks have started the second quarter with losses, markets typically add to their gains after ending the first quarter up, said Sam Stovall, an equity strategist at S&P Capital IQ. Using data going back over more than 60 years, Mr. Stovall says the S&P 500 has gained an average of 9 percent from April to December after rising in the first quarter.

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