The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 options prices known as the VIX, slumped 16% today to 16.41 for its biggest retreat since April. The gauge is down 9% in 2013.
“The market has been very emotional,” Paul Mangus, head of equity strategy and research for Wells Fargo Private Bank in Charlotte, North Carolina, said in a phone interview. His firm manages $170 billion. “You had days of positive, relief rallies followed by days of angst and concerns over the debt ceiling and government shutdown. Until we reach a period where we have clarity on that, we’d expect volatility to be elevated.”
U.S. Treasury Secretary Jacob J. Lew warned Congress today that “uncertainty” over the debt limit is starting to stress financial markets and trying to time an increase to the last minute “could be very dangerous.”
The U.S. government has a week before its borrowing authority lapses on Oct. 17. A Treasury Department report on Oct. 3 said consequences would be “catastrophic” should the U.S. default, including higher interest rates, lower investment and slow growth for decades to come.
A partial federal government shutdown lasting through the end of this week would pare 0.2 percentage point from U.S. economic growth and cost as much as 0.5 point if it continues another two weeks, according to the median estimate in a Bloomberg survey of economists taken Oct 4-9.
Claims for U.S. jobless benefits jumped last week to the highest level in six months, a Labor Department report today showed, providing the first statistical warning that the damage from the partial federal shutdown is starting to ripple through the economy.
Most Fed officials last month predicted drag from fiscal restraint would be a reason for them to hold the benchmark lending rate at 2% or lower until the end of 2016 to support growth and job creation.
Investors will watch financial reports as more companies release third-quarter results. Profits for companies in the S&P 500 probably increased 1.7% during the three months while sales rose 2.2%, according to analysts’ estimates compiled by Bloomberg. The projections are down from 5.7% and 3.6%, respectively, from the end of June.
“There is not a pent-up expectation that this is going to be a gangbuster quarter,” Mangus said. “Consequently, you can have some positive surprises.”
All 10 S&P 500 industry groups rallied at least 1%. Companies whose earnings are most tied to economic swings led the gains. The Morgan Stanley Cyclical Index jumped the most in three weeks, adding 1.5%.
Industrial shares surged 2.5% to pace gains. Boeing, the world’s largest planemaker, rallied 3.5% to $118.51.
Nike advanced 3.3% to $73.25. DA Davidson & Co. raised its stock-price estimate for the world’s largest sporting-goods maker to $76 from $75 after the company said yesterday that annual sales will rise to $36 billion by the end of fiscal 2017.