By Angela Moon
NEW YORK (Reuters) - U.S. stocks closed lower on Monday with just hours to go before a midnight deadline to avert a federal government shutdown, but major indexes ended September with solid monthly gains.
Losses were broad across the board and the decline accelerated in late trading but the benchmark S&P 500 index still ended up 3 percent for the month and 4.7 percent for the quarter. The Nasdaq jumped more than 10 percent for the quarter, its biggest quarterly gain since the first quarter of 2012.
With the law funding thousands of routine government activities set to expire at midnight, U.S. Senate Democrats killed a proposal by the Republican-led House of Representatives to delay Obamacare for a year in return for temporary funding of the federal government beyond Monday.
A government shutdown would have wide-ranging implications for most assets. If a deal were reached quickly, markets might recover, but a prolonged shutdown could harm the economy and consumer confidence. While a deal could still be reached before the government's fiscal year ends at midnight on Monday, such a possibility was considered unlikely.
Market participants have grown accustomed to political battles in Washington resulting in a last-minute accord and voiced skepticism any shutdown would last for an extended period. But the CBOE Volatility index VIX <.VIX>, often used to measure investor anxiety, rose 7.4 percent to 16.6 on Monday.
"I think coming out of the end of the week on Friday, the consensus pretty much was there wouldn't be a shutdown and that consensus has eroded somewhat, and that uncertainty has scared some nervous money out of the market," said Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama.
The Dow Jones industrial average <.DJI> was down 128.57 points, or 0.84 percent, at 15,129.67. The Standard & Poor's 500 Index <.SPX> was down 10.20 points, or 0.60 percent, at 1,681.55. The Nasdaq Composite Index <.IXIC> was down 10.12 points, or 0.27 percent, at 3,771.48.
For the month, the Dow rose 2.2 percent and the Nasdaq added 5.1 percent. For the quarter, the Dow was up 1.5 percent while the S&P 500 gained 4.7 percent.
Among the day's decliners, energy shares <.SPNY> slumped 0.8 percent, in line with a decline in U.S. crude oil prices as the possible government shutdown stoked demand concerns. Exxon Mobil fell 1 percent to $86.04 while Occidental Petroleum lost 1 percent to $93.54.
Defense names also declined, as a government shutdown would most likely diminish the number of new contracts. Lockheed Martin Corp fell 1.3 percent to $127.55 and Alliant Techsystems Inc lost 0.7 percent to $97.56. The PHLX defense sector <.DFX> lost 0.8 percent.
Some healthcare stocks outperformed the broader market including St. Jude Medical , up 2.4 percent at $53.64 and Edwards Life , up 1.2 percent at $69.63. Boston Scientific Corp was also up 1.9 percent at $11.74.
Some market participants viewed any pullback in equities as a buying opportunity, based on historical performance after prior shutdowns and the low risk of a steep decline.
Historically, Wall Street has managed to avoid steep downside during similar incidents. During the federal government shutdown from December 15, 1995, to January 6, 1996, the S&P 500 added 0.1 percent. During the November 13 to November 19, 1995, shutdown, the benchmark index rose 1.3 percent, according to data by Jason Goepfert, president of SentimenTrader.com.
Up to 1 million government employees could be furloughed and, if the shutdown takes place, the Labor Department will postpone its closely-watched monthly employment report scheduled for Friday.
In a note to clients, Bank of America Merrill Lynch analyst Savita Subramanian said the risk of a correction of more than 10 percent from the political wrangling is a "low probability event," and "given that valuation, sentiment and fundamentals remain supportive, we would view such an event as a buying opportunity."
Standard & Poor's Ratings Services said the debate over raising the U.S. debt limit is unlikely to change the country's sovereign rating as long as it is short-lived. In 2011, similar political tension prompted the loss of the United States' triple-A credit rating.
Trading volume totaled about 6.33 billion shares on the New York Stock Exchange, the Nasdaq and the NYSE MKT, in line with average daily closing volume of about 6.3 billion this year.
Decliners outpaced advancers on the NYSE by 1,796 to 1,204 and on the Nasdaq by 1,393 to 1,165.
(Reporting by Angela Moon; Editing by Nick Zieminski)