Stocks closed in the red Wednesday, amid mounting worries that the budget battle in Washington that led to a government shutdown could eventually lead to a failure to raise the country's borrowing limit.
(Read more:Get out the rally hats: Shutdowns are bullish!)
The Dow Jones Industrial Average dropped 58 points to close at 15,133.14, dragged by United Tech and American Express. The S&P 500 and the Nasdaq also closed slightly lower. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped above 16.
Most key S&P sectors ended in negative territory, led by consumer staples and industrials.
The partial shutdown of the federal government entered its second day, with an estimated 800,000 federal employees furloughed. Experts say even if the shutdown issue is resolved, investors will have a bigger hurdle to jump when the Treasury Department will exhaust its borrowing limit on Oct. 17. Unless Congress votes to raise the debt ceiling, the U.S. will default on its debt for the first time ever.
(Read more:The government shutdown probably kills 'Octaper')
"We believe the U.S. government shutdown over the continuing resolution should be primarily seen through one prism—does it increase or decrease the chances of a smooth resolution to the debt ceiling? For now, the markets seem to believe that this shutdown will cause only minor disruption and will, at the very least, not worsen the debt ceiling negotiations—and we agree," Barclays analysts Hamish Pepper and Ajay Rajadhyaksha said in a research note.
Negotiations continued in Washington as Senate Majority Leader Harry Reid reportedly sent a letter to and called House Speaker John Boehner offering budget talks. But the conversation did not seem to lead to a resolution on the shutdown.
President Obama was addressing the government shutdown, the roll-out of the Affordable Care Act and the looming debt ceiling in an interview to be aired on CNBC later on Wednesday.
(Read more:If you could ask the president anything, what would it be?)
Separately, Obama met with top banking CEOs at the White House.
Goldman Sachs CEO Lloyd Blankfein urged Congress not to use threats of defaulting on U.S. debt as a "cudgel" to get policy changes, adding that business leaders agree the failure to raise the debt ceiling would lead to "extremely adverse" consequences.
Michael Corbat of Citigroup, Jamie Dimon of JPMorgan and Brian Moynihan of Bank of America were among other high-profile bank CEOs at the meeting.
Meanwhile, Senate Majority Leader Harry Reid and House Speaker John Boehner spoke by phone, with Reid saying he wants "Clean" spending bill before the conference.
"Should any of these uncertainties and Washington wrangling fuel additional market pullback in the near term, we believe these dips would represent buying opportunities for investors," wrote Stuart Freeman and Scott Wren of Wells Fargo Advisors. "We believe that the breadth of growing within the economy is still likely to bring us roughly 5 percentage points of operating earnings growth next year and a further strength in investor confidence alongside some P/E expansions."
Wells Fargo Advisors maintained its 1,850 to 1,900 target range for the S&P 500 index for year-end 2014. The index stood at 1,693 on Wednesday.
Equities were also pressured by a weaker-than-expected private-sector jobs report. Private employers added 166,000 jobs in September, according to the ADP National Employment Report, missing expectations for a gain of 180,000. The ADP data is usually seen as a preview to the widely-watched monthly government jobs report, which is likely to be delayed due to the shutdown.
"Employment growth picked up in the past two months, but it remains disappointing given all the fiscal and monetary stimulus that is still being pumped into the economy," said David Santschi, CEO of TrimTabs.
Also on the economic front, weekly mortgage applications slipped last week as a drop in demand for purchase loans outweighed an increase in refinancing demand, according to the Mortgage Bankers Association.
European shares remained in the red after the European Central Bank left its interest rates unchanged, as expected.
"We view this recovery as weak, as fragile, as uneven," said ECB president Mario Draghi at a press conference following the decision. He reiterated his previous commitment to keeping rates at present or lower levels for an extended period of time.
Meanwhile, Italian stocks traded higher after the government of Prime Minister Enrico Letta won a Senate confidence vote. The dramatic turnaround came after former Prime Minister Silvio Berlusconi said he would support Letta after an increasing number of his party members rebelled against the move to pull down the government.
First published October 2 2013, 1:13 PM