Stocks fell Monday after Republican and Democratic leaders offered competing proposals to avoid a catastrophic default on the U.S. government's debt.
Lawmakers hoped to reach a compromise on raising the country's borrowing limit late Sunday, but those talks stalled. President Barack Obama wants to raise revenues by letting tax cuts for wealthy Americans expire. Republicans have pushed for more spending cuts and have rejected higher taxes.
If an agreement is not reached by Aug. 2, the U.S. won't have enough cash to pay all its bills. That could have a huge impact on financial markets. The U.S. would likely lose its coveted triple-A credit rating. Interest rates would rise for millions of consumers. And stocks could fall the way they did during the 2008 financial crisis, analysts say.
Most traders expect the White House and Capitol Hill to come up with a last-minute deal. Yet there are still uncertainties about higher taxes or changes to government spending that could affect corporate profits. Investors also worry that the government may only come up with a short-term fix that could still trigger a credit rating downgrade.
"We're thinking this is going to be resolved," said Rob Lutts, president and chief investment officer of Cabot Money Management. "The question: Is it resolved from a standpoint of a long-term solution or a stop-gap measure?"
The Dow Jones industrial average fell 88.36 points, or 0.7 percent, to close at 12,592.80. The Dow had been down as many as 145 points earlier.
Stock trading has varied widely in July because of concerns over debt problems in the U.S. and Europe. Prior to Monday, the Dow had alternated between gains and losses over the previous nine days. The VIX, a measure of volatility in U.S. stock prices, has risen 16 percent in July.
Many investors are reluctant to buy stocks because of concerns over the budget impasse in Washington. Trading volume, or the number of shares bought and sold on a given day, has fallen 22 percent in July on the New York Stock Exchange compared with the same month a year ago, according to FactSet. If that continues, July will have the lowest average daily volume since December 2007.
Some investors have turned to gold and other precious metals as a place to park money while the U.S. and European debt problems get sorted out. Gold rose $10.70 to $1,612.20 an ounce Monday, while silver rose 24 cents to $40.36 an ounce. Gold has risen 14 percent this year, while silver is up 31 percent.
Even as debt troubles continue in the U.S. and Europe, U.S. companies have been reporting higher profits. David Kelly, chief market strategist at J.P. Morgan Funds, wrote in a note to clients that the per-share earnings of companies in the S&P 500 index are expected to rise to a record in the second quarter. If that happens, it would surpass the previous record set in the second quarter of 2007.
"Corporate America has done very well," said Randy Bateman, chief investment officer at Huntington Asset Advisors. "People are looking at these earnings as good indications that there's value in stocks."
After the market closed, Netflix Inc.'s stock fell 8 percent as the DVD rental company issued a third-quarter revenue forecast that was below analysts' estimates. Netflix is bracing for its subscriber growth to slow after it raised prices by as much as 60 percent earlier this month.
E-Trade Financial Corp. rose 6 percent, the most of any company in the S&P 500, after The Wall Street Journal reported that larger rival TD Ameritrade is considering a bid for the company. E-Trade's largest shareholder also called on E-Trade to hold a special meeting to consider selling the company.
Tenet Healthcare Corp. fell 4 percent after earnings at its competitor, the hospital chain HCA Inc., were far weaker than analysts expected as patients had fewer costly surgical procedures. HCA fell 19 percent.
BlackBerry maker Research In Motion Ltd. fell 4 percent after the company said it would eliminate 2,000 jobs, or about 10 percent of its work force. The company has had several product delays and is facing tough competition from Apple's Inc.'s iPhone and smartphones that used Google Inc.'s Android operating system.
About four stocks fell for every one that rose on the New York Stock Exchange. Volume was relatively light at 3.3 billion shares.