The stock market was whipsawed Tuesday as the on-again, off-again talk of a debt deal in Washington made investors wonder just how pessimistic they should be.
Stocks were flat or down all day, but the size of the losses waxed and waned depending on which politician was giving a press conference. The market closed with its first loss in a week, with the Dow Jones industrials down 133 points. Yields on short-term government debt rose sharply as investors worried about the possibility of a default.
Indexes were down only slightly early Tuesday, when Republican and Democratic leaders in the Senate reported that a deal over increasing the nation's borrowing limit appeared to be getting closer. But after House Republicans came up with their own competing plan later in the day, and it was rejected by Democrats, stocks fell further.
The stakes are high and the deadline is getting nearer. Unless the borrowing limit is raised, the U.S. will bump up against a Thursday deadline after which it can no longer borrow money to pay its bills, which could lead to a default on government debt. That possibility has rattled markets all month.
After markets closed, Fitch Ratings said it might downgrade the government's AAA bond rating. The agency said it sees a higher risk for default because of the uncertainty over whether Congress will raise the debt limit. Fitch said it will make a final decision by the end of March at the latest, depending on how long any agreement to raise the debt ceiling lasts.
It was clear that traders were hanging on every word out of Washington. The losses on the Dow shrank by about 40 points during a short press conference by House Speaker John Boehner shortly before noon Eastern.
Another reason for Wall Street's pessimism is that any deal reached this week might simply set up another showdown a few months down the road.
The Dow Jones industrial average fell 133.25 points, or 0.9 percent, to 15,168.01. The Standard & Poor's 500 index fell 12.08 points, or 0.7 percent, to 1,698.06. The Nasdaq composite fell 21.26 points, or 0.6 percent, to 3,794.01.
The losses were broad. All 10 industry groups in the S&P 500 fell and three stocks fell for every one that rose on the New York Stock Exchange.
Uri Landesman, president of Platinum Partners, a New York-based investment management group, said he thinks there will be a deal, but that investors are making a mistake to focus on it so heavily since the economy still has so many risks. Investors aren't appreciating the risk of poor economic reports, slow profit growth and the possibility of flare-ups in conflicts with Iran and Syria, which could cause a spike in energy prices.
"There's a lot more risk to the downside," Landesman said. "I don't think things are that robust out there."
Among stocks making big moves:
— FedEx shareholders were happy about expanded stock buybacks. FedEx's stock rose $4.71, or 4 percent, to $120.08.
— Charles Schwab rose $1.02, almost 5 percent, to $23.03 after the brokerage company said its quarter profit rose 19 percent as trading and interest revenue increased.
— Advertising company Omnicom Group reported adjusted results and revenue that were higher than analysts had expected. Its stock rose $1.01, almost 2 percent, to $64.96.
Parts of the bond market have started to show signs of stress.
The yield on the 10-year T-note rose to 2.73 percent from 2.69 percent on Friday. Bond trading was closed Monday for Columbus Day. Yields on three-month and six-month T-bills also rose.
The yield on the one-month T-bill nearly doubled in only a few hours, going from 0.18 percent early Tuesday to 0.34 percent by the afternoon. It's considered to be the T-bill most likely to be affected by a federal government default. Money market funds owned by Fidelity and JPMorgan Chase & Co. have been selling off their one-month T-bill holdings to limit their exposure to the security.
The price of oil fell $1.20 to close at $101.21 as negotiations over Iran's nuclear abilities began.
AP Markets Writer Ken Sweet contributed to this report.