Speaker John Boehner on Sunday ruled out a vote in the House of Representatives on a straightforward bill to increase the borrowing authority of the U.S. government without concessions from President Barack Obama.
On the same day, Treasury Secretary Jack Lew said President Obama has not changed his opposition to coupling a bill to re-open the government and raise the nation's borrowing limit with Republican demands for changes in the health care law and spending cuts.
Lawmakers have until Oct. 17 to reach a deal on increasing the nation's debt ceiling. Failure to strike a deal could cause the United States to miss payments on its debt. The Treasury warned last week that a default could push the economy into a downturn even worse than the Great Recession.
"Everything now is predicated on Washington," said Quincy Krosby, market strategist for Prudential. "That is what the market is focused on completely, getting a deal done to avoid a default."
The Dow Jones industrial average was down 66 points, or 0.4 percent, at 15,004 as of noon Eastern time. The Standard & Poor's 500 index dropped six points, or 0.4 percent, to 1,683. The Nasdaq composite fell 19 points, or 0.5 percent, to 3,788.
The losses were broad. All ten sectors in the S&P 500 dropped, led by banks and other financial companies.
Until now, the stock market has mostly moved sideways since the shutdown began at the start of the month, indicating that investors still expect lawmakers to come up with a deal. The S&P 500 is flat since the start of the month.
In government bond trading, the yield on the 10-year Treasury note fell to 2.62 percent from 2.65 percent. The yield has fallen close to its lowest in two months as investors bought Treasuries on concern that U.S. economic growth will slow as the budget impasse drags on.
Some investors still see the current slump in stock markets as a blip rather than a change in the long-term trend of the market because the Federal Reserve is still keeping up with an unprecedented stimulus effort that has helped support a four-year rally in stocks.
The stock market climbed to record levels in September after the Federal Reserve said it would keep buying $85 billion of bonds a month to support the U.S. economy. Many investors had expected the central bank to announce that it would start reducing its stimulus.
Minutes from the September meeting will be published Wednesday, giving investors an insight into the central bank's thinking.
"We would encourage investors with a long-time horizon to think of this as a buying opportunity," said Kristina Hooper, U.S. Head of Investment and Client Strategies at Allianz Global Investors. Many investors, who bought bonds after the financial crisis and the Great Recession, still hold too many bonds in their investment portfolios, she said.
In commodities trading, the price of oil dropped 57 cents, or 0.5 percent, to $103.28 a barrel as crude production in the Gulf of Mexico got back on track after a storm system passed through. The price of gold rose $15.60, or 1.2 percent, to $1,325.90 an ounce.
Among stocks making big moves:
- Cooper Tire & Rubber fell $3.58, or 12 percent, to $25.94 after the company filed a complaint in Delaware Chancery Court on Friday asking that Apollo Tyres be required to quickly close their pending deal. Investors are taking the news as a sign that the deal is in jeopardy.
- Toymaker Mattel slipped 82 cents, or 1.9 percent, to $41.74 after a Goldman Sachs analyst cut his earnings estimates for the toy maker. The investment bank also cut its estimates for Hasbro, which fell 67 cents, or 1.4 percent, to $46.77. Goldman is predicting a tough holiday season for the toy makers as children favor video games.
- Apple rose $8.59, or 1.8 percent, to $490 after a Jefferies analyst raised his rating and price target on the stock, saying improving margins should help the business until the launch of the iPhone 6.