The Standard & Poor's 500 index on Monday fell the most since November as partial election results in Italy spurred concern about prospects for a stable government.
The Standard & Poor's 500 index closed down 27.75, or 1.83%, at 1,487.85, after gaining as much as 0.7% earlier Monday. The Dow Jones industrial average closed down 216.40, or 1.55%, at 13,784.17; and the Nasdaq composite closed down 45.57, or 1.44%, at 3,116.25. All numbers are preliminary.
The Chicago Board Options Exchange Volatility index, which measures the cost of using options as insurance against declines in the S&P 500, surged 36% to 19.20 for the biggest jump since August 2011.
“We don't want to see more chaos out of Europe,” Bruce McCain, chief investment strategist at the private-banking unit of KeyCorp, said in a phone interview. His firm oversees more than $20 billion. “Any question about whether or not Italy would be committed to austerity measures after the elections gets investors concerned.”
Stocks erased gains on concern Italy might be left with a hung parliament as partial election results suggested Silvio Berlusconi might have built a blocking minority in the Senate to deny victory to Pier Luigi Bersani. Mr. Bersani, who led in opinion polls throughout the two-month race, campaigned to maintain the budget rigor of outgoing Prime Minister Mario Monti. Bets that Japan's Prime Minister Shinzo Abe will nominate a central bank chief who favors stimulus had pushed stocks higher earlier Monday.
This week's March 1 deadline to avoid automatic U.S. spending cuts might get investors' attention. It marks another fiscal showdown between President Barack Obama and congressional Republicans. If Congress doesn't act, federal spending will be reduced by $85 billion in the final seven months of this fiscal year and by $1.2 trillion over the next nine years.
The S&P 500 has gained 4.3% this year as U.S. lawmakers agreed on a compromise on taxes in January and amid better-than-estimated corporate earnings. About 75% of the S&P 500 companies that have released quarterly results topped profit estimates, according to data compiled by Bloomberg. The index trades at 14.7 times reported earnings, below the average since 1954 of 16.4.
“Continued earnings momentum and rising corporate confidence suggest improved capital spending this year,” said James Paulsen, the chief investment strategist at Wells Capital Management, which oversees about $325 billion.