Stocks drop as investors look to Washington

The stock market's slow bleed got a little worse Tuesday.

The decline is the result of squabbling in Washington over raising the nation's debt limit and a government shutdown that has dragged on for more than a week. Moderate losses for the stock market in the first days of the shutdown have accelerated this week as the U.S. has moved closer to an Oct. 17 deadline for lifting the government's borrowing authority.

Stocks opened flat, moved steadily lower and slumped in the final minutes of trading Tuesday. The loss added to a three-week decline that has knocked the Standard & Poor's 500 index down 4 percent since hitting a record high on Sept. 18.

Swings in the market will likely increase the closer the U.S. gets to the debt deadline without a resolution, said Randy Frederick, Managing Director of Active Trading and Derivatives at the Schwab Center for Financial Research.

"Virtually everyone expects that there will some sort of a resolution," Frederick said. "But I wouldn't be surprised if it only came right before the last minute."

The S&P 500 index dropped 20.67 points, or 1.2 percent, to 1,655.45. It was the biggest one-day drop for the index since Aug. 20. The declines were led by phone companies.

House Republicans have insisted that a temporary funding bill contain concessions on President Barack Obama's health care law. The president wants a bill to simply reopen the government, without strings attached.

Obama said he had told House Speaker John Boehner he's willing to negotiate with Republicans on their priorities, but not under the threat of "economic chaos." Speaking at a press briefing in Washington, the president warned that the U.S. risked a "very deep recession" if the debt ceiling wasn't raised.

The Dow Jones industrial average fell 159.71 points, or 1.1 percent, to 14,776.53. The Nasdaq composite dropped 75.54 points, or 2 percent, to 3,694.83.

Nervous investors also dumped short-term government debt as they worried that the standoff in Washington could jeopardize the nation's ability to pay its bills, including interest on its debt, as early as next week if Congress doesn't raise the borrowing limit.

The yield on Treasury bills maturing in one month soared to 0.28 percent, hitting its highest level since the 2008 financial crisis. The yield was 0.15 percent on Monday and close to zero at the beginning of October.

The yield, which rises as the price of the notes fall, has surged as managers of money-market funds become more wary of holding short-term government debt that matures shortly after the debt deadline.

There were other signs of increasing investor nervousness.

The VIX index, which rises when investors are getting more concerned about stock fluctuations, climbed to its highest level of the year.

"Unfortunately, we're just held hostage by what's going on in Washington," said Dan Veru, Chief Investment Officer of Palisade Capital Management.

U.S. companies will start reporting earnings for the third quarter in earnest this week, giving investors something else to think about other than Washington.

Aluminum producer Alcoa, which was recently removed from the Dow Jones industrial average, said Tuesday that it had swung to a profit in the third quarter despite lower aluminum prices, as it was helped by demand from auto makers and by cost-cutting moves.

JPMorgan and Wells Fargo are also among the companies releasing earnings this week.

The yield on the 10-year Treasury note was little changed at 2.63 percent. The yield on the longer-term note has fallen in the past month, suggesting that investors see any potential default as a short-term phenomenon and are predicting that economic growth will remain subdued in the longer term.

Stocks also slumped the last time that the U.S. came close to hitting its debt ceiling in the summer of 2011. The S&P 500 dipped 5 percent between the start of July and Aug. 2 of that year, when President Barack Obama signed into a law a bill that raised the debt ceiling and promised more than $2 trillion in cuts to government spending over a decade. Stocks extended their slide after S&P cut its rating on U.S. government debt on Aug. 5.

Analysts point out, though, that the global economy was in a far more fragile state two years ago than it is now. Europe was still in the throes of its debt crisis, the U.S. economic recovery was less strong and the U.S. budget deficit has shrunk since then.

The dollar fell against the euro and rose against the Japanese yen.

Among stocks making big moves:

— Jamba plunged $2.53, or 18.8 percent, to $10.94 after the company cut its fiscal 2013 guidance, saying reduced spending by consumers hurt its sales in the third quarter.

— Xerox fell 26 cents, or 2.5 percent, to $10.14 after the company said the Securities and Exchange Commission is investigating accounting practices at one of its units.

— McKesson rose $4.09, or 3.2 percent, to $133.72 after The Wall Street Journal reported that the health services company was in talks to acquire its German rival Celesio for about $5.1 billion.

___

AP Markets Writer Ken Sweet contributed to this report.