U.S. Stocks Fall as Internet Shares Tumble Amid Shutdown

U.S. stocks fell, giving the Standard & Poor’s 500 Index its biggest two-day loss since June, as concern grew that a deadlock among U.S. lawmakers over the debt limit could lead to a government default.

An index of Internet stocks tumbled the most in almost two years, sinking 4.1 percent. Facebook Inc. and Yahoo! Inc. lost at least 3.5 percent. Xerox Corp. slid 2.5 percent after announcing the U.S. has been probing the accounting practices of its outsourcing division. Alcoa Inc. gained 1.5 percent in late trading after posting quarterly earnings that topped forecasts.

The S&P 500 fell 1.2 percent to 1,655.45 at 4 p.m. in New York, the lowest since Sept. 6. The Dow Jones Industrial Average lost 159.71 points, or 1.1 percent, to 14,776.53. The Nasdaq Composite Index tumbled 2 percent to 3,694.83. About 6.9 billion shares changed hands on U.S. exchanges, nearly 20 percent higher than the three-month average.

“The market is going to start to push the government,” Rick Fier, director of equity trading at Conifer Securities LLC in New York, said in an interview. “The longer it drags on, the more uncomfortable everyone gets because we will not rally until something gets done. Get out now and wait for the storm to pass to get back in.”

The S&P 500 slumped 0.9 percent yesterday to a four-week low as lawmakers remained deadlocked over extending the nation’s debt limit to avoid a default. Its two-day slide of 2.1 percent is the biggest since June 21. The gauge has fallen 4.1 percent since its latest record on Sept. 18.

Recession Risk

President Barack Obama said the U.S. economy risks a “very deep recession” if Congress doesn’t raise the debt ceiling. Obama spoke less than four hours after he called House Speaker John Boehner to “reiterate that he won’t negotiate on a government-funding bill or debt-limit increase,” said Brendan Buck, a Boehner spokesman.

Lawmakers began taking the first tentative steps toward a path to raising the limit even as the rhetoric grew more divisive. Senate Democrats are planning a test vote before the end of this week on a measure that would grant Obama authority to raise the ceiling, probably for a year, unless two-thirds of both chambers of Congress oppose.

The Treasury has said that it will exhaust measures to avoid exceeding the borrowing limit on Oct. 17. If that happens, the government will run out of cash to pay all of its bills at some point between Oct. 22 and Oct. 31, according to the Congressional Budget Office.

‘More Unpredictable’

Even as the probability of a U.S. government default is “very, very small,” volatility in the markets will increase in coming days, Mohamed El-Erian, chief executive officer and co-chief investment officer at Pacific Investment Management Co. A U.S. default on its debt obligations would prove more unpredictable to financial markets than the 2008 collapse of Lehman Brothers Holding Inc., he said.

“What frightens us the most is what happens to the plumbing system of the global-financial system,” El-Erian said in an interview on Bloomberg Television’s “Bloomberg Surveillance” with Tom Keene. “You will have cascading failure, multiple defaults, and Treasuries that act as collateral would be very difficult to exchange and people will simply step back. It will be like Lehman, but more unpredictable.”

Volatility High

The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 options prices known as the VIX, jumped 4.8 percent today to 20.35, its highest close in 2013.

From its intraday low of 12.52 on Sept. 20, the VIX jumped 68 percent to its highest level of today, 21.01. That’s the fifth time in 2013 that the index climbed more than 50 percent from trough to peak, according to data compiled by Bespoke Investment Group and Bloomberg. The gauge of options prices remains almost 58 percent below its 2011 high, the data show.

Volume on the VIX rose to a record 1.78 million contracts, according to data compiled by Bloomberg. About 1.14 million calls changed hands compared with more than 639,000 puts, data compiled by Bloomberg show.

“The VIX pit was nuts, all day, non-stop,” Mark Caffray, who brokers contracts on the VIX and the S&P 500 at Chicago-based PTR Inc., said in an interview. “Customers are hedging either side of the government gridlock outcome. We are assuming the trend continues as customers continue to use the VIX as a bigger part of their hedging strategy.”

Nine of the 10 S&P 500 main industries fell as telephone, materials, consumer-discretionary and technology stocks slipped more than 1.6 percent for the worst performance.

The Nasdaq Internet Index tumbled 4.1 percent for the biggest decline since November 2011, as all its 81 members dropped. The gauge had surged 49 percent this year through yesterday, almost triple the gain in the S&P 500. At 24 times reported income, the valuation in Internet shares has risen 67 percent this year.

‘Locking in’

Facebook, the operator of the world’s most popular social network, slumped 6.7 percent to $47.14. The stock had advanced 90 percent this year through yesterday. Yahoo declined 3.5 percent to $32.93, trimming its 2013 gain to 65 percent. TripAdvisor Inc., an online travel agent that’s up 71 percent this year, sank 5.5 percent to $71.70.

“The debt ceiling is causing the fear over locking in returns,’” Ian Winer, director of equity trading at Wedbush Securities Inc., said in an interview. “Guys are looking at their portfolios and saying, ’These are up huge, maybe I sell some to lock in some gains and revisit post debt-ceiling resolution.’”

Short Interest

Stocks with the highest short interest were among the market’s biggest losers. A Goldman Sachs Group Inc.’s basket of stocks with the most bearish bets against them slid 2.3 percent, paring its rally in 2013 to 35 percent.

Xerox dropped 2.5 percent to $10.14. The U.S. Securities and Exchange Commission has been probing the accounting practices of Affiliated Computer Services Inc., an outsourcing company acquired in 2010, Xerox said in a regulatory filing. The SEC focused on whether revenue from ACS equipment and resale transactions should have been recorded on a net rather than gross basis, Xerox said in the filing.

Masco Corp. fell 5.3 percent to $19.40. The maker of home improvement and building products faces slowing growth amid a potential loss in the market share, Kenneth Zener, an analyst with Keybanc Capital Markets Inc., said in a note. He cut the stock’s rating to underweight from hold.

McKesson Corp. climbed 3.2 percent to a record $133.72. The largest U.S. drug distributor is in advanced talks buy German drug wholesaler Celesio AG, Dow Jones reported, citing unidentified people.

Alcoa Earnings

Alcoa gained 1.5 percent to $8.06 at 5:42 p.m. in New York. The largest U.S. aluminum producer, reported third-quarter profit that surpassed analysts’ expectations after higher earnings from one of its divisions that turns the metal into auto and aerospace parts. The stock fell 0.4 percent during the regular session today.

The Alcoa release marks the unofficial start of the U.S. quarterly earnings season as it is the first S&P 500 company to report results whose fiscal year follows the calendar. JPMorgan Chase & Co. and Wells Fargo & Co. will also report this week.

Data Delay

Investors will look to companies’ financial results for clues on the economy’s performance as the government shutdown, in its eighth day, delays the publication of some data. The S&P 500 has declined 1.6 percent since the government began on Oct. 1 its first shutdown in 17 years after lawmakers failed to reach an agreement on budgets before the start of a new fiscal year.

Profits for the S&P 500 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.

“A lot of the S&P earnings for the year are fourth-quarter loaded,” Bernie Williams, chief investment officer of investment solutions who oversees $16.7 billion at USAA Investments in San Antonio, said in a phone interview. “It’s more of the commentary that counts.”

Recommendation Cut

Garry Evans, global head of equity strategy at HSBC Holdings Plc, cut his recommendation on U.S. equities to neutral from overweight, saying valuations are “a little stretched.” He advised investors to increase holdings in emerging markets because growth in China is stabilizing and stocks are cheap.

The S&P 500 has climbed 16 percent this year as earnings beat estimates and data from manufacturing to housing and the labor market improved. The benchmark gauge is trading at 15.9 times reported earnings, up 12 percent from the beginning of the year and compared with a multiple of 11.9 for the MSCI Emerging Markets index, data compiled by Bloomberg show.

The International Monetary Fund reduced its global outlook for this year and next as capital outflows further weaken emerging markets and warned that a U.S. government default “could seriously damage the global economy.”

Growth worldwide will be 2.9 percent this year and 3.6 percent next year, the IMF said in a report released today in Washington, compared with July predictions of 3.1 percent for 2013 and 3.8 percent for 2014. The IMF’s forecasts factor in a short U.S. government shutdown and an agreement on the nation’s debt-limit before the Oct. 17 deadline.

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