NEW YORK — Political drama in the nation's capital fueled fears on Wall Street that a threatened federal government shutdown could plunge financial markets into turmoil.
The Dow Jones industrial average skidded 128.57 points, or 0.84%, to 15,129.67 on Monday amid signs that Democrats and Republicans were getting no closer to a budget deal that would avert the first government shutdown in 17 years.
Investors are wary that the impasse could have an effect on future debates — especially one slated on the federal debt ceiling. That fight could have broader implications for the nation's credit rating, which was downgraded after a similar debate in 2011.
"We could see markets tumble," said Jack Ablin, chief investment officer at BMO Private Bank. "Ultimately, it will hurt. It will leave a scar."
Fiscal scuffles in Washington can roil markets. In August 2011, the previous debt ceiling debate sent stocks whipsawing for weeks and even triggered a 600-point dive in the Dow.
That sell-off followed the decision of ratings firm Standard & Poor's to strip the U.S. government of its sterling AAA credit rating. S&P said Monday that it did not expect the current debate to lead to another change in the U.S. credit rating, "as long as it is short-lived."
Investors have sent stocks sinking nearly 2% over the last week as posturing over the budget and President Obama's healthcare overhaul heated up on Capitol Hill. But overall, the major indexes have been hanging in there as the third quarter drew to a close Monday.
The Dow has notched a 1.5% gain over the last three months and is up 15.5% for the year. The broader S&P 500 index gained 4.6% in the previous quarter, while the tech-focused Nasdaq composite index rose 10.8%.
The last quarter of the year might not see the same kind of traction, analysts said.
The market had been looking for direction in the federal government's monthly jobs and unemployment report due out Friday. But the Labor Department said Monday that its September report might be delayed if federal workers are sent home this week.
The biggest worry this week was expected to be whether a shutdown could be avoided, and if it couldn't, how long it would last. If history repeats itself, investors might be in for steep losses.
During the Clinton-era shutdown, stocks lost about 4% from mid-December 1995 through early January 1996, according to Sam Stovall, chief equity strategist for S&P Capital IQ.
But after President Clinton and Congress finally reached an agreement and the government reopened, stocks took off, rising more than 10% in the following month, Stovall said.
Many on Wall Street were gambling that a last-minute accord would yet avert a shutdown.
"People just expect Congress to step to the edge of the brink, maybe go a little bit over, and then compromise," said Bernie Williams, chief investment officer at USAA Investments.