U.S. Stocks Drop on Default Concern Amid Budget Deadlock

U.S. stocks fell, with the Standard & Poor’s 500 Index dropping to the lowest level in a month, as lawmakers remained deadlocked over extending the nation’s debt limit to avoid a default.

Bank of America Corp. and Wells Fargo & Co. paced declines among banks, each slipping 1.7 percent. International Business Machines Corp. retreated 1.1 percent as Barclays Plc lowered its recommendation. Cooper Tire & Rubber Co. sank 13 percent as Apollo Tyres Ltd. is seeking to cut its $2.5 billion offer to buy the U.S. company. Apple Inc. gained 1 percent after Jefferies Group LLC upgraded the stock.

The S&P 500 fell 0.9 percent to 1,676.12 at 4 p.m. in New York, the lowest since Sept. 9. The Dow Jones Industrial Average declined 136.34 points, or 0.9 percent, to 14,936.24. About 5 billion shares changed hands on U.S. exchanges, the slowest trading since Aug. 29.

“The volume is very light so I do think investors are trying to feel their way through this,” Walter Todd, chief investment officer at Greenwood Capital Inc., said in a phone interview from Greenwood, South Carolina. He helps manage $950 million. “Each day that it goes by without any type of solution or any hope of a solution, the market gets more and more concerned about what the ultimate outcome is.”

Speaker John Boehner said yesterday in an interview on ABC’s “This Week” that the House of Representatives can’t pass a debt-ceiling increase without packaging it with other provisions. Boehner said the country could default if President Barack Obama doesn’t negotiate. Obama today challenged congressional Republicans to raise the U.S. debt limit by next week and said he’s willing to negotiate on fiscal terms once that is done and government funding is restored.

Pay Bills

Without an increase to the debt limit, the U.S. will exhaust its borrowing authority on Oct. 17 and would run out of funds to pay all of its bills sometime between Oct. 22 and Oct. 31, according to the Congressional Budget Office. Senate Democrats could introduce legislation as soon as today that gives Obama the authority to raise the debt ceiling unless two-thirds of Congress disapproves, according to a Senate Democratic aide.

S&P stripped the U.S. of its AAA credit rating in August 2011 amid a stalemate between Obama and Congress over whether to raise the debt ceiling. The S&P 500 fell more than 11 percent in three days.

Moody’s Investors Service said it sees a “very low” chance the U.S. will default on its debt payments. The impact of the partial government shutdown on the economy may not be particularly damaging in the short term, and the effect would be seen gradually over time if it was an extended one, Chief Executive Officer Ray McDaniel said in a Bloomberg Television interview in Bali on Oct. 5.

Data Delays

The S&P 500 had its first back-to-back weekly decline since August as the government began on Oct. 1 its first shutdown in 17 years, placing as many as 800,000 federal employees on unpaid leave and closing some services, after lawmakers failed to reach an agreement on budgets before the start of a new fiscal year.

The action delayed the release of the Labor Department’s monthly payrolls report, due last week. Should the shutdown continue, economic data to be postponed this week include September retail sales and August trade.

The lack of data is making it harder for Federal Reserve policy makers to assess the health of the economy as they consider when to start paring unprecedented monetary stimulus.

The S&P 500 jumped to a record on Sept. 18 as the central bank unexpectedly refrained from reducing its $85 billion monthly bond-buying program, saying it wants more evidence of an economic recovery before scaling back stimulus. The Fed will release the minutes of its Sept. 17-18 meeting on Oct. 9.

‘Too Fragile’

“The economy is too fragile if they push to the limit” on the debt ceiling, said Tom Stringfellow, president and chief investment officer of San Antonio-based Frost Investment Advisors LLC, which manages $9.3 billion. “I suspect the central bank will continue with the channels and volume they’ve been going through for the last several years.”

Three rounds of Federal Reserve stimulus have helped drive the S&P 500 up about 150 percent from a 12-year low in 2009. The benchmark index has rallied 18 percent this year on better-than-estimated earnings and as data from manufacturing to housing and the labor market improved.

The U.S. earnings season starts tomorrow with Alcoa Inc., America’s biggest aluminum producer, scheduled to release third-quarter results after the market closes.

Earnings Estimates

Profits for the broad index probably increased 1.7 percent during the third quarter while sales rose 2.2 percent, according to analysts’ estimates compiled by Bloomberg. Analysts anticipate earnings growth to accelerate to 8.9 percent in the final three months of the year, the data show.

“Some people are a little nervous that companies are going to use the excuse of the uncertainty in Washington yet again as to why they don’t have to or why they’re not going to perhaps be as optimistic about the fourth quarter and 2014 as the estimates currently reflect,” Darren Bagwell, director of research at Thrivent Asset Management in Minneapolis, said in a phone interview. His firm oversees about $82 billion.

The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 options prices known as the VIX, jumped 16 percent today to 19.41, erasing its loss for the year and reaching the highest closing level since June 24.

All 10 industries in the S&P 500 declined except for telephone companies. Consumer-discretionary, financial and raw-materials stocks fell the most, sinking at least 1.2 percent.

Banks Retreat

The KBW Bank Index sank 1.9 percent as all its 24 members retreated. Bank of America dropped 1.7 percent to $13.81. Wells Fargo, the largest U.S. home lender, lost 1.7 percent to $40.62.

Cooper Tire tumbled 13 percent to $25.72. Apollo Tyres is seeking to cut offer to buy Cooper after U.S. and Chinese workers challenged the takeover plan. Cooper acknowledged the $35-a-share offer should be reduced and that “the issue now is by how much,” Gurgaon, India-based Apollo said.

IBM slipped 1.1 percent to $182.01. Barclays cut its rating on the world’s largest computer-services provider to equal-weight, or hold, from overweight, citing concern that IBM’s cash flow may be affected as customers move to online-based software.

Qualcomm Inc. dropped 1.2 percent to $67.19. Tal Liani, an analyst with Bank of America Corp., cut the rating on the largest U.S. wireless equipment maker to neutral from buy, citing a potential “significant deceleration” in revenue and earnings growth over the next two years amid a slowdown in the smartphone market.

DukeNet Acquisition

Time Warner Cable Inc. fell 1.6 percent to $111.02. The second-largest U.S. cable company agreed to buy fiber-optic network provider DukeNet Communications LLC for $600 million in cash. Time Warner Cable plans to use DukeNet to expand its business services in seven Southeastern states, including North and South Carolina.

Apple climbed 1 percent to $487.75. Peter Misek, an analyst with Jefferies, raised the stock’s rating to buy from hold, citing suppliers becoming more lenient on price.

Demand for iPhone 5 remains solid and expectations for iPhone sales are “conservative,” Timothy Arcuri, an analyst with Cowen & Co., said in a note to clients.

Alcoa added 0.1 percent to $7.97, erasing a loss of as much as 1.5 percent in the final minute of trading. Alcoa’s profit probably doubled during the third quarter to 6 cents a share amid higher demand from the aircraft and automotive industries, according to analysts’ estimates compiled by Bloomberg.

Intuitive Surgical Inc. jumped 4.6 percent, the most in the S&P 500, to $380.99. The maker of robot surgery devices is seeing many general surgeons moving “aggressively” to learn the company’s da Vinci system, according to Ben Andrew, an analyst with William Blair & Co. who attended the Clinical Robotic Surgery Association meeting in Washington.