U.S. stocks fell, after the Standard & Poor’s 500 Index (CME:SPZ13) dropped to the lowest level in a month, as congressional leaders said the other party must move to resolve the government shutdown and avoid a debt default.
Xerox Corp. slid 1.5% after announcing the U.S. has been probing the accounting practices of its outsourcing division. J.C. Penney & Co. climbed 4.5% as the retailer said its sales decline slowed in September. McKesson Corp. climbed 4.2% on a report that it’s in advanced talks with majority shareholder Franz Haniel & Cie GmbH to buy German drug wholesaler Celesio AG.
The S&P 500 fell 0.6% to 1,665.51 at 11:35 a.m. in New York. The Dow Jones Industrial Average lost 80.15 points, or 0.5%, to 14,856.09. The Nasdaq Composite Index tumbled 1.4% to 3,718.56. Trading in S&P 500 stocks was 7.5% above the 30-day average during this time of day.
“You’re going to see the debt limit ceiling coming to play at the end of the week and the market could get volatile,” Bernie Williams, chief investment officer of investment solutions who oversees $16.7 billion at USAA Investments in San Antonio, said in a phone interview. “But the assumption on everybody’s part is that this gets revolved in a week or two, maybe in a messy way, and doesn’t damage the economy.”
The S&P 500 slumped 0.9% yesterday to a four-week low as lawmakers remained deadlocked over extending the nation’s debt limit to avoid a default.
U.S. congressional leaders said the other party must act to resolve the impasse. Senate Majority Leader Harry Reid said the Republican-controlled House should vote to end the government shutdown and drop demands to change the 2010 Affordable Care Act. House Speaker John Boehner said Reid and President Barack Obama should negotiate.
Lawmakers began taking the first tentative steps toward a path to raising the U.S. debt 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 $16.7 trillion debt ceiling, probably for a year unless two-thirds of both chambers of Congress disapprove.
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.
The S&P 500 has declined 0.9% 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. As the shutdown delays the publication of some economic data, investors will turn their attention to companies’ financial results.
An earnings release from Alcoa, America’s largest aluminum producer, marks the unofficial start of the U.S. quarterly reporting season after the close of New York trading today. JPMorgan Chase & Co. and Wells Fargo & Co. will also report this week.
Profits for the S&P 500 probably increased 1.7% during the third quarter while sales rose 2.2%, according to analysts’ estimates compiled by Bloomberg. Analysts anticipate earnings growth to accelerate to 8.9% 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,” Williams at USAA Investments said. “It’s more of the commentary that counts. What I’ll be really looking to would be, from a sector perspective, both information technology and industrial’s comments on the global economy and if they’re starting to see a pickup, and then, the discretionary to see how the consumers held up.”
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.”
The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 options prices known as the VIX, rose 1.3% today to 19.67 after a 16% surge yesterday.
Eight of the 10 S&P 500 main industries fell as telephone, raw-materials and technology stocks slipped more than 0.9% for the worst performance. Utility and consumer-staples shares gained at least 0.4%.
Xerox dropped 1.5% to $10.24. 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.
J.C. Penney climbed 4.5% to $8.06 for its first gain in eight days. The department-store chain working to rebound from a $985 million loss said its sales decline slowed in September and that the improvement will last through the end of the year.
Chief Executive Officer Mike Ullman is working to turn around the department-store chain after his predecessor’s failed attempt to transform J.C. Penney into a destination for younger, wealthier shoppers. Ullman has reinstituted sales events and revived popular private-label brands to lure consumers back into stores.
McKesson climbed 4.2% to $135.06. The largest U.S. drug distributor is in advanced talks to buy Celesio for almost 22 euros a share, Dow Jones reported, citing unidentified people. Spokesmen for Celesio and Haniel declined to comment. Representatives of McKesson couldn’t be immediately reached for comment.
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 17% this year as earnings beat estimates and data from manufacturing to housing and the labor market improved. The benchmark gauge is trading at 16 times reported earnings, up 12% 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 cut 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% this year and 3.6% next year, the IMF said in a report released today in Washington, compared with July predictions of 3.1% for 2013 and 3.8% 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.