Stocks lost more than 1 per cent on Friday after a Republican proposal for averting the "fiscal cliff" failed to pass, diminishing hopes that a deal would be reached soon in Washington.
Trading is expected to be volatile as investors view a fiscal agreement between the White House and Republicans before the end of the year as increasingly unlikely. Lower volume heading into next week's Christmas holiday could increase volatility. The CBOE Volatility Index, or VIX, was up 10 per cent.
Late on Thursday, Republican House Speaker John Boehner conceded there were insufficient votes from his party to pass a tax bill, dubbed "Plan B," to help avert the so-called fiscal cliff — $600 billion of tax hikes and spending cuts due to start in January. The fear is that failure to come up with a solution to avoid the cliff could tip the US economy into recession.
Plan B had called for tax increases on those who earn $1 million or more a year, and the bill's failure suggested it would be difficult to get Republican support for the more expansive tax increases that US President Barack Obama has urged, making it less likely an agreement will be reached between the White House and Republicans before the end of the year.
While Friday's slide reflected investors' anxiety, it was not a large enough drop to suggest they believed a deal would be reached too late to avoid damage to the economy, said Mark Lehmann, president of JMP Securities, in San Francisco.
Banking shares, which outperform in times of economic expansion and have led the market on signs of progress with resolving the fiscal impasse, were among the laggards. Citigroup Inc sank 2.7 per cent to $39.10, while Bank of America slid 2.5 per cent to $11.22. The KBW Banks index lost 1.7 per cent.
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The Dow Jones industrial average dropped 185.38 points, or 1.39 per cent, to 13,126.34. The Standard & Poor's 500 Index tumbled 20.88 points, or 1.45 per cent, to 1,422.81. The Nasdaq Composite Index lost 46.64 points, or 1.53 per cent, to 3,003.74. The S&P Retail Index fell 1.5 per cent.
Even with the declines, the S&P 500 is up nearly 1 per cent for the week and about 13 per cent for the year, though uncertainty over the cliff may prompt many traders to lock in gains as the year draws to a close.
US-listed shares of Research in Motion sank 17 per cent to $11.72 after the Canadian company, which makes the BlackBerry, reported its first-ever decline in its subscriber numbers late on Thursday.
The day's round of data indicated that the economy showed surprising signs of resilience in November as consumer spending rose by the most in three years and a gauge of business investment jumped.
But separate data showed consumer sentiment slumped in December. The S&P Retail Index fell 1.5 per cent.
US-listed shares of Research in Motion sank 17 per cent to $11.72 after the Canadian company, which makes the BlackBerry, reported its first-ever decline in its subscriber numbers late on Thursday.