MARKET SNAPSHOT: U.S. Stocks Fall On China Worries; Dow At 5-week Low

By Anora Mahmudova, MarketWatch

NEW YORK (MarketWatch) -- U.S. stocks closed sharply lower on Thursday as weak economic data from China prompted investors to sell resource stocks and emerging-markets assets and seek safety in bonds, gold, and high-dividend paying sectors.

The S&P 500(SPX) fell 16.40 points, or 0.9%, to 1,828.46, breaking a two-day winning streak. Losses were led by financials and materials sectors. Only telecoms, a sector whose stocks are known for their dividend yields, ended higher. The benchmark index is down 1.1% year-to-date.

The Dow Jones Industrial Average(DJI) fell to a five-week low, shedding 175.99 points, or 1.1%, to 16,197.35. The blue-chip index recorded its third straight session of losses.

The Nasdaq Composite (RIXF) lost 24.13 points, or 0.6% to 4,218.87, trimming gains it clocked in since the start of the year. Read the recap of the stock market live blog.

Indexes suffered broad-based losses amid high trading volumes. Thursday's total composite volume was the largest this year, as more than 7.3 billion shares changed hands, according to FactSet.

Investors appeared most worried about the surprise contraction in China's manufacturing sector, which followed concerns over the country's financial system. On Tuesday, China's central bank announced it is injecting more liquidity into the system ahead of the Lunar New Year holiday.

"China's banks have been having liquidity issues since last summer, and what worries investors is contagion. If their problems are severe, large banks in the U.S. and Europe will be affected, triggering another crisis," said Quincy Krosby, market strategist at Prudential Financial. "What is happening in the U.S. stock market is consolidation and realization that the Fed is not going to come to the rescue of the markets with liquidity anymore, as the economy is growing again."

Gold closed at a two-month high and Treasurys rallied, sending yields lower. The concern about China, alongside expectations the Federal Reserve's monetary tightening would lead to higher U.S. interest rates, hit emerging markets assets hard. The ETF tracking the benchmark MSCI Emerging Markets index (EEM) closed at a four-month low.

Among the day's other economic data, an early gauge of U.S. manufacturing dipped in January from the prior month, but some of the slowdown was due to cold weather, Markit reported Thursday. The U.S. flash purchasing managers index slipped to 53.7 in January, down from December's level of 55, which was an 11-month high. This is the slowest improvement in conditions since October.

U.S. initial jobless claims rose slightly to 326,000. "Today's jobless claims data had a worrying component -- continuing claims stayed above 3 million. Investors are concerned about the labor market and it is showing in today's selloffs," said Chris Gaffney, senior market strategist at EverBank.

The leading economic index rose 0.1% in December, marking its sixth gain in a row, the nonprofit Conference Board said Thursday.

In the housing sector, sales of existing homes rose 1% in December to a 4.98 million annual rate, while the median sale price climbed 9.9% to $198,000.

In earnings news, McDonald's (MCD) reported nearly flat earnings in the fourth quarter, as sales edged down slightly while expenses rose. Earnings per share were $1.40, slightly ahead of consensus expectations. Chief Executive Don Thompson called 2013 "a challenging year." Shares in the fast-food chain ticked up 0.5%.

Shares in Netflix Inc. (NFLX) rallied 16.5% after the video streaming company reported better-than-expected earnings late on Wednesday.

Herbalife Ltd (HLF) shares slid 10% after U.S. Sen. Edward Markey, a Democrat from Massachusetts, on Thursday called for an investigation of the business practices of the company, which he called "a possible pyramid scheme."

Santander Consumer USA Holdings (SC) climbed 5% on its debut, after the auto lender sold 74 million shares at $24, raising $1.8 billion.

In after-hours market, shares in Starbucks Corp. (SBUX) rose 0.7% after the coffee-shop chain reported quarterly earnings above analysts' expectations.

Microsoft Corp. (MSFT) shares rallied 3.7% in the after-hours market, after the company reported better quarterly earnings and revenue than analysts expected.

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