The Dow traded around 100 points lower Tuesday after a hot start to the week.
Investors are resetting after a "nice two-day bounce back," said Peter Boockvar, chief investment officer at Bleakley Advisory Group.
The Dow added 410 points, or 1.7%, on Monday and 331 points on Friday to brush off a tumultuous week.
"The market is always going to be a battle between optimists and pessimists," said Brad McMillan, chief investment officer for Commonwealth Financial Network. "The optimists have run out of buying power for the moment."
The National Federation of Independent Business' optimism index rose in January, the organization announced early Tuesday. Boockvar said the report was another sign that inflationary pressures are building.
Inflation concerns investors because it could lead the Federal Reserve to hike interest rates more quickly than planned. That would make the cost of borrowing higher and would put a dent into corporate profits.
Last Monday, the Dow plunged 1,175 points -- its worst decline in history -- following a report that wages grew at the fastest pace since 2009.
Investors will be watching Wednesday's Bureau of Labor Statistics consumer price index data closely for a pickup in inflation. On Thursday, the producer price index comes out.
Both reports have taken on added significance, according to Quincy Krosby, chief market strategist at Prudential Financial.
"We're looking for a pattern from different perspectives on inflation. We saw wages beginning to show traction. We'll see if these reports also indicate that inflation is in fact gaining," she said.
If the consumer price data comes in higher than investors expect, it may lead to a pickup in selling, predicted McMillan.
European markets posted mild losses in early trading on Tuesday, while stocks fared better in Asia.
The Hong Kong and Shanghai markets were the biggest gainers, adding around 1%. Japan's Nikkei started the day strong before sliding into the red in the afternoon, losing 0.7%.
Calm hasn't exactly returned to Wall Street, but after six straight days of at least 500-point swings, Monday was somewhat of a respite. The VIX, Wall Street's volatility gauge, fell 12% on Monday after spiking last week. It was up slightly early Tuesday.
"You very rarely have a recovery from the kind of pullback that we saw taking place last week in one day," said Krosby. "Markets need to test. And they test, and they test before they find an equilibrium. That's normal and it's expected."
So far, the Dow has recovered more than a quarter of the 2,756 points it lost between the peak on January 26 and the closing low on Thursday.
Despite the comeback on Monday, the Dow and S&P 500 remain down slightly for the year. The Nasdaq is up 1.1% in 2018.
The stock market has been taking cues from the bond market. The 10-year Treasury yield, which reflects inflation worries, is trading near a four-year high. Higher returns for ultra-safe government bonds could hurt demand for riskier assets like stocks.
-- Charles Riley, Sherisse Pham, Jethro Mullen and Matt Egan contributed reporting to this story.
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