Washington Worries Ease But Investors Still on Edge

Updated Oct. 9, 2013 4:46 p.m. ET

U.S. stocks staged a slight advance Wednesday, though investors continued to play defense during the ongoing stalemate in Washington.

The Dow Jones Industrial Average rose 26.45 points, or 0.2%, to 14802.98. On Tuesday, the Dow slid 160 points, or 1.1%, to a six-week low.

The S&P 500 index edged up 0.95 point, or 0.1%, to 1656.40. The Nasdaq Composite Index lost 17.06 points, or 0.5%, to 3677.78.

Stocks wavered between mild gains and losses for much of the session. Trading has been bumpy amid low volume in recent days, as investors worry that the political impasse in Washington could continue past the deadline to raise the debt ceiling late this month. Missing the deadline could lead to a default.

It’s definitely been choppy, said Jeffrey Yu, U.S. head of single-stock trading for UBS AG. Investors are worried and looking to protect their gains on the year.

In the Markets

Benchmarks turned higher midday after news that President Barack Obama would meet with House Democrats on Wednesday afternoon and House Republicans on Thursday. But gains were moderate, and investors said they would look for more signs of progress.

That’s an olive branch … maybe it’s a little more like an olive twig, said Jason Pride, director of investment strategy at money-management firm Glenmede, which oversees $22 billion. It seems like a change, but I would be shocked if there were a complete 180 in the direction of the negotiations, he said.

Stocks and sectors that have outperformed the broader market this year declined for a second day, and the traditionally defensive telecommunications and utilities sectors were the best performers in the S&P 500.

The market darlings have been getting taken out back and shot today, said Viren Chandrasoma, managing director in equity trading at Credit Suisse Group AG. It’s hard to hold stocks that are priced for perfection when you have a possibility of default that’s slightly bigger than zero.

High-flying names such as Tesla Motors. Netflix and Amazon.com saw declines. The Russell 2000 Index fell 0.4%, and the Nasdaq Biotechnology Index sank 2.4%.

Stocks got an extra boost on news from the Federal Reserve. Investors say that continued stimulus efforts from the Fed have helped support markets amid the political gridlock. Stocks rose in early trading as the White House announced that Janet Yellen would be nominated to lead the Fed, as she is seen as a proponent of easy-money policies.

ENLARGE

Traders work on the floor of the New York Stock Exchange on Wednesday. Associated Press

A lot of people expected Yellen, said Paul Zemsky, chief investment officer of multiasset strategies at ING U.S. Investment Management, which oversees $180 billion. But it will be positive once we get through this mess in Washington, he added.

Shares extended gains slightly after Fed meeting minutes were released. The minutes said that officials still hope to start cutting back on their stimulus efforts this year.

The news from lawmakers and the Fed eclipsed the unofficial start to corporate earnings season, which kicked off when Alcoa reported third-quarter results late Tuesday.

Whether it’s the Fed or Washington, we’re just trying to get some clarity, said Mark Freeman, chief investment officer at Westwood Holdings Group, which manages $16 billion. I feel like we’re trying to look through stained glass. You know there’s light on the other side, you just can’t see through to what’s there.

Alcoa shares climbed after the aluminum company reported late Tuesday that earnings rose more than expected, amid lower costs and improved productivity. Revenue declined less than forecast.

Investors also eyed consumer stocks, as a pair of retailers reported mixed results. Discount retailer Family Dollar Stores Inc. slid after it provided earnings forecasts below analysts’ expectations. Costco rose, despite missing Wall Street forecasts for the first time in two years, as analysts said that sales at the big-box retailer were strong.

I don’t want to lose sight of what’s happening with the consumer, said Mr. Freeman.

He is neutral on stocks closely tied to spending, as we don’t expect them to shut their wallets, but we don’t expect them to go on a spending spree, either.

Yum Brands. the parent company of KFC and Taco Bell, slumped after reporting earnings that below analyst forecasts late Tuesday. The company also lowered its full-year outlook, citing weakness in China sales.

Earlier Wednesday, the Mortgage Bankers Association said that its seasonally adjusted index of mortgage applications rose 1.3% in the latest week, as a 2.5% increase in refinancing activity offset a 0.7% decline in purchase applications. Data on wholesale inventories for August were postponed due to the government shutdown.

The yield on the 10-year Treasury note rose to 2.652% from 2.634% late Tuesday.

Crude-oil futures slipped 1.8% to $101.61 a barrel, while gold futures lost 1.3% to $1,306.90 a troy ounce. The dollar rose against the yen and the euro.

European markets declined, with the Stoxx Europe 600 closing down 0.6%. U.K. industrial production in August fell 1.1% on the month, missing expectations of a 0.3% rise. Meanwhile, German industrial production rose 1.4% in August, topping forecasts for a 1% increase.

Asian markets erased early losses to close mostly higher following news of Ms. Yellen’s nomination. Japan’s Nikkei Stock Average rose 1%, and China’s Shanghai Composite advanced 0.6%.

In corporate news, Men’s Wearhouse soared after it rejected a $2.3 billion bid from Jos. A. Bank Clothiers. Jos. A. Bank shares climbed as well.