U.S. stocks drop on default concern amid debt-limit deadlock

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 150% from a 12-year low in 2009. The benchmark index has rallied 18% this year on better-than- estimated earnings and as data from manufacturing to housing and the labor market improved.

U.S. earnings season starts tomorrow with Alcoa, 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% during the third quarter while sales rose 2.2%, according to analysts’ estimates compiled by Bloomberg. Analysts expect earnings growth to accelerate to 8.9% 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 10% today to 18.46, erasing its loss for the year and heading for the highest closing level since June 24.

Seven out of 10 industries in the S&P 500 declined. Consumer-discretionary, financial and raw-materials stocks fell the most, sinking at least 0.7%.

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