Stocks ended the worst week in a year as time runs out on Washington to reach agreement before the government loses its ability to borrow money.
The S&P 500 fell every day this week and was down 3.9 per cent for the week as legislators failed to work out an agreement to raise the federal borrowing limit, which expires on Tuesday. Investors also worry about the likelihood of a US credit downgrade.
The CBOE Market Volatility Index , a gauge of investor fear, jumped as much as 9 per cent to its highest level since mid-March before paring its rise.
Natalie Trunow, chief investment officer of equities at Calvert Investment Management in Bethesda, Maryland, said investors are taking a more defensive stance, possibly moving more into cash.
“It’s frustrating for investors and for US citizens to see this unfold in the way it has been,” she said.
“From an overall asset allocation standpoint, in an environment like this, you get bigger moves into cash and safe havens.”
The Dow Jones industrial average .DJI was down 96.87 points, or 0.79 per cent, at 12,143.24. The Standard & Poor’s 500 Index .SPX was down 8.39 points, or 0.65 per cent, at 1,292.28. The Nasdaq Composite Index .IXIC was down 9.87 points, or 0.36 per cent, at 2,756.38.
US President Barack Obama told Republicans and Democrats to find a way “out of this mess.” The United States will be unable to borrow money to pay its bills if Congress does not raise the debt limit by August 2.
A second attempt for a vote in the House of Representatives is expected after the close of trading on Friday after a bill was modified to try to win over more conservative lawmakers. The measure has little chance of passing in the Senate, however.
At least one credit rating agency has said it is likely to lower the United States’ prized tripe-A rating if the cuts in Washington don’t go far enough.
“Will the deal be enough to satisfy the credit rating agencies is really what’s at stake here,” Trunow said, whose firm manages about $14.8 billion. The S&P utility index is down 2.1 per cent for the week, while the Dow is down 4.2 per cent and the Nasdaq is down 3.6 per cent for the week. Major indexes also posted losses for the month: the Dow and S&P 500 each lost 2.2 per cent while the Nasdaq fell 0.6 per cent.
The S&P 500 briefly fell below its 200-day moving average, seen as key support, and bounced back from its worst levels of the day.
Weak economic data also weighed on equities. The US economy stumbled badly in the first half of this year and came dangerously close to contracting in the January-March period.
Among declining stocks, Chevron Corp, the second-largest US oil company, fell 1 per cent to $104.02 despite reporting a 43 per cent jump in quarterly profit that beat estimates.
Energy led declines on the Dow on Friday, but the industrial sector was among the hardest hit for the week. The S&P industrial sector lost 6.1 per cent this week, following disappointing results from companies including Illinois Tool Works.
“The industrial sector appears to be pricing in lower earnings ahead,” said Chris Burba, a short-term market technician at Standard & Poor’s in New York.
Some 8.58 billion shares changed hands on the New York Stock Exchange, NYSE Amex and Nasdaq, above the daily average of 7.48 billion. Declines outweighed advances on the NYSE by about 2 to 1, while on Nasdaq losers outpaced winners by about 7 to 5.
