U.S. stocks fell, with the Standard & Poor’s 500 Index dropping the most in a month, as data showed weaker-than-forecast growth in service industries and concern grew that the political impasse could lead to a recession.
Eli Lilly Co. dropped 3.4 percent after the drugmaker said it would be “challenging” for it to meet its 2014 sales target. United Technologies Corp., a supplier of helicopters and jet engines to the military, retreated 1.2 percent after saying the shutdown would lead to as many as 5,000 temporary layoffs. Boeing Co. sank 2.2 percent as industrial stocks led losses among S&P groups. PulteGroup Inc. slid 2.4 percent as all 11 members of an S&P gauge of homebuilders fell.
The S&P 500 lost 0.9 percent to 1,678.66 at 4 p.m. in New York, its steepest slide since Aug. 27. The Dow Jones Industrial Average fell 136.66 points, or 0.9 percent, to 14,996.48. About 6.3 billion shares changed hands on U.S. exchanges, or 8.6 percent more than the three-month average.
“I think people are starting to raise an eyebrow finally,” Joseph Saluzzi, partner and co-head of equity trading at Themis Trading LLC in Chatham, New Jersey, said in a phone interview. “The longer this goes on, people get a little more nervous. And when people get nervous they sell first and ask questions later.”
Talks last night between congressional leaders and President Barack Obama failed to break the fiscal stalemate that has caused the first government shutdown in 17 years, with both sides repeating the positions they’ve held for weeks.
‘One Way Out’
Obama said today there is only “one way out” -- for House Speaker John Boehner to allow a vote on a stopgap spending bill without conditions. The speaker urged Democrats to negotiate a settlement, blaming them for causing the stoppage.
The S&P 500 fell as much as 1.4 percent before trimming its decline. The paring accelerated after Boehner’s spokesman said the speaker would not let the government breach the debt ceiling.
Boehner “has always said that the U.S. will not default on its debt, but if we’re going to raise the debt limit, we need to deal with the drivers of our debt and deficits,” spokesman Michael Steel said.
The Treasury has said measures to avoid exceeding the $16.7 trillion debt ceiling will be exhausted by Oct. 17 and warned today that a default caused by failure to raise the cap could have catastrophic consequences that might last decades.
“Not only might the economic consequences of default be profound, those consequences, including high interest rates, reduced investment, higher debt payments, and slow economic growth, could last for more than a generation,” the Treasury said in the report.
“The debt ceiling is a cause for concern,” Mike Sorrentino, who helps oversee about $3 billion as chief strategist at Global Financial Private Capital LLC, said by phone from Sarasota, Florida. “ If we can get through that and we can get through the dysfunction with this government, there will be a much safer road ahead.”
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, and the S&P 500 (SPX) fell more than 11 percent in three days.
The losses were later reversed, as the Federal Reserve pledged to hold the benchmark interest rate near zero and maintain bond purchases to support the economy. The S&P 500 gained 25 percent in the 12 months through August 2012.
The S&P 500 gained 0.7 percent in the first two days of the shutdown, as investors speculated any economic effects would be limited.
A stoppage lasting one week would probably shave 0.1 percentage point from economic growth, according to the median estimate of economists in a Bloomberg survey, with the costs accelerating if the closure persists.
Data today showed service industries in the U.S. expanded in September at a slower pace than forecast, indicating a pause in the momentum of the biggest part of the economy before the federal government closed.
The Institute for Supply Management’s non-manufacturing index fell to 54.4 in September from 58.6 the prior month. The median forecast in a Bloomberg survey called for a drop to 57. The figure includes industries that range from utilities and retail to health care, housing and finance and make up almost 90 percent of the economy.
A separate report from the Labor Department showed fewer Americans than forecast filed applications for unemployment benefits last week, indicating U.S. employers were maintaining staff counts in the days leading up to the government shutdown.
The Labor Department will not release its September payrolls report tomorrow as scheduled because of the shutdown.
Investors have been scrutinizing data to determine whether the Federal Reserve will curb bond purchases after its meeting this month. The S&P 500 rallied 4.7 percent in the third quarter, closing at a record on Sept. 18, as the central bank maintained stimulus measures and companies reported better-than-estimated earnings.
The Chicago Board Options Exchange Volatility Index, or VIX, rose 6.5 percent to 17.67 today, bringing its gain this week to 14 percent. The equity volatility gauge briefly erased its loss today, and closed at the highest level since June 25.
All 10 main S&P 500 industries retreated at least 0.4 percent today, with utility and industrial stocks sinking at least 1.1 percent to pace declines. Boeing Co. dropped 2.2 percent to $115.24 for the steepest slide in the Dow.
The Dow Jones Transportation Average lost 1.1 percent to a three-week low, as FedEx Corp. plunged 1.5 percent to $113.55.
The S&P Supercomposite Homebuilding Index lost 1.9 percent, as all 11 members retreated. PulteGroup slumped 2.4 percent to $16.50 and D.R. Horton Inc. dropped 2.4 percent to $19.07.
A Bloomberg index that tracks 70 companies that get at least 3.5 percent of their revenue from federal contracts fell 1.4 percent today, extending its decline this week to 7.7 percent.
United Technologies (UTX:US) lost 1.2 percent to $103.69. The military contractor said the impasse will force it to lay off as many as 5,000 employees. The first effect will be layoffs for about 2,000 Sikorsky Aircraft employees in Connecticut, Florida and Alabama on Oct. 7, the contractor said yesterday.
UTC receives about 18 percent of its revenue from the government, Chief Financial Officer Gregory Hayes told analysts this week.
“The comments made by United Technologies will be a good proxy for what to expect,” said Andreas Nigg, head of equity and commodity strategy at Vontobel Asset Management in Zurich. “Most companies will most likely continue to provide very cautious guidance in general, and the shutdown isn’t helping.”
Eli Lilly lost (LLY:US) 3.4 percent to $48.80. The drugmaker said a slowdown in emerging markets and the weakening of the yen will make it “challenging” for it to meet its 2014 sales target.
Lilly also plans to repurchase (LLY:US) $5 billion of shares over time, the company said in a statement today. The Indianapolis-based company reaffirmed its goal of generating at least $20 billion in revenue, $3 billion of net income and $4 billion of operating cash flow next year.
Zale Corp. sank 7.1 percent to $14.64 after the jewelry retailer registered to issue 11.06 million shares related to warrants it sold in 2010. The Wall Street Journal reported that private equity firm Golden Gate Capital Inc. has the right to buy the stock at $2 a share.
PVH Corp. jumped (PCH:US) 4.4 percent to $122.69. The maker of Calvin Klein and Tommy Hilfiger clothing said yesterday that it plans to sell its G.H. Bass and Co. division to G-III Apparel Group Ltd. for $50 million in cash.
Constellation Brands Inc. added 3.2 percent to a record $60.15. The maker of Svedka Vodka, Black Velvet Canadian Whiskey and Robert Mondavi wines raised its earnings forecast for fiscal 2014 after reporting second-quarter earnings that surpassed analyst expectations.
Delta Air Lines Inc. (DAL:US)climbed (DAL:US) 1.2 percent to a record $24.54 after gaining for the eighth time in nine sessions. Morgan Stanley raised its 2014 and 2015 profit estimates for the carrier and boosted its stock-price target to $35. The firm said Delta is a “win/win play” on the potential merger of U.S. Airways Group Inc. and AMR Corp.’s American Airlines.
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