All 10 main industries in the S&P 500 retreated. Procter & Gamble Co. and Coca-Cola Co. slipped more than 1.5 percent to pace declines among consumer-staples companies. Devon Energy Corp. and Tesoro Corp. lost at least 1.6 percent as energy shares slid 0.8 percent amid a drop in oil prices. J.C. Penney Co. fell 2.7 percent, extending last week’s losses.
The S&P 500 fell 0.6 percent to 1,681.55 at 4 p.m. in New York. The benchmark gauge added 3 percent for the month, giving it a quarterly gain of 4.7 percent, as the Federal Reserve kept its $85 billion of monthly bond-buying. The Dow Jones Industrial Average lost 128.57 points, or 0.8 percent, to 15,129.67 today. About 6.3 billion shares changed hands on U.S. exchanges, 8.7 percent above the three-month average.
“We are at the mercy of whatever develops in Washington,” Michael James, a Los Angeles-based managing director of equity trading at Wedbush Securities Inc., said in an interview. “An attempt to prevent a shutdown is not totally unexpected, but some agreement will be better than none.”
U.S. lawmakers have to approve emergency legislation by midnight to keep the federal government operating from tomorrow, the beginning of the 2014 fiscal year. Failure to do so may result in as many as 800,000 federal employees being placed on temporary unpaid leave.
Republicans and Democrats remained at odds over whether to tie any changes to President Barack Obama’s Affordable Care Act to a short-term extension of government funding. The Senate voted 54-46 to reject the House’s latest plan, in a party-line move that puts the pressure back on House Republicans.
In a government shutdown, essential operations and programs with dedicated funding would continue. The Treasury will sell debt, while economic reports from the Commerce Department will be suspended and the Bureau of Labor Statistics will stop operations. Commerce is scheduled to release data this week on construction spending and factory orders before the Labor Department’s closely watched jobs report on Oct. 4.
The S&P 500 fell 1.1 percent last week, its first weekly drop since August, amid concern the budget impasse will hurt the economy. A shutdown would reduce fourth-quarter economic growth by as much as 1.4 percentage points depending on its duration, according to economists. Three rounds of Fed stimulus and better-than-forecast corporate earnings have pushed the S&P 500 up 149 percent from a March 2009 low.
In addition to battling over the budget, U.S. lawmakers face another fiscal dispute over raising the $16.7 trillion debt ceiling. The Treasury has said measures to avoid exceeding the limit will be exhausted on Oct. 17.
The debt limit is a bigger problem than a federal shutdown, though the U.S. will probably avoid both, Moody’s Investors Service said in a report today.
“It’s a headwind with the government shutdown, but it’s not as meaningful to investors as the debt ceiling,” Oliver Pursche, co-manager of the GMG Defensive Beta Fund and president of Suffern, New York-based Gary Goldberg Financial Services, said in a phone interview. The firm manages about $800 million. “Investors have grown numb to all of this and they understand that the failure of politicians to act is being offset by central bank actions.”
The S&P 500 rallied to a record close on Sept. 18 after the Fed unexpectedly refrained from reducing the pace of monthly bond buying at its last policy meeting. Economists now anticipate the central bank will pare the size of purchases in December, according to 59 percent of 41 economists in a Sept. 18-19 survey.
Last year’s debate over federal spending also weighed on the equities market, only to be followed by a market rally in 2013. The S&P 500 dropped as much as 3.4 percent over the last two weeks of 2012 as lawmakers wrangled over impending automatic spending cuts and tax increases known as the fiscal cliff. It then jumped 5 percent in January for the best start to a year since 1997 after a last-minute budget deal was struck.
The VIX, a measure of the cost to protect against declines in the S&P 500, jumped 7.4 percent to 16.60 today. While it also rose during the previous two sessions, it remains on pace for its second consecutive annual decline after retreating 6.5 percent in 2013. It closed at 15.46 at the end of last week, 24 percent below its average since 1990.
Energy producers, consumer-staples and financial stocks fell as much as 0.7 percent, leading declines among all 10 groups in the S&P 500.
Procter & Gamble slipped 2.1 percent, the most in the Dow, to $75.59 and Coca-Cola retreated 1.4 percent to $37.88. Consumer-staples companies lost 1.1 percent as a group.
Devon Energy slid 1.6 percent to $57.76 and Tesoro retreated 1.7 percent to $43.98. Crude futures dropped 0.5 percent to the lowest level in almost three months.
Apple Inc. declined 1.2 percent to $476.75. The maker of iPhones climbed 3.3 percent last week after reporting record sales of the latest models of the smartphone in their debut weekend.
Johnson Controls Inc. tumbled 2.4 percent to $41.50. The auto-parts maker was cut to underweight from overweight by Morgan Stanley analyst Ravi Shanker, who said expectations may be too high heading into the company’s analyst day on Dec. 18. The shares have rallied 35 percent this year.
J.C. Penney dropped 2.7 percent to $8.81. The department-store chain plummeted 30 percent last week as it began a share offering to raise as much as $932 million and lowered its year-end liquidity forecast. J.C. Penney, which hasn’t turned a quarterly profit since mid-2011, is down 55 percent for the year.
Regeneron Pharmaceuticals Inc. jumped 2.4 percent to $312.87 following positive trial data for Eylea as a treatment for diabetic macular edema.
Chipotle Mexican Grill Inc. added 2.3 percent to $428.80 as the shares were raised to overweight by Morgan Stanley.
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