U.S stocks sank more than 1 percent on Friday (December 21) after a Republican proposal for averting the "fiscal cliff" failed to pass, diminishing hopes a deal would be reached soon in Washington.
Trading is expected to be volatile as investors view a fiscal agreement between the White House and Republicans before the year-end as increasingly unlikely. With volume thin ahead of the holidays, market swings could be amplified. The CBOE Volatility index jumped 11.5 percent.
Late on Thursday, Republican House Speaker John Boehner conceded there were insufficient votes from his party to pass a tax bill, dubbed "Plan B," to help avert the cliff, $600 billion (USD) of tax hikes and spending cuts due to start in January that could tip the economy into recession.
Plan B had called for tax increases on those who earn $1 million a more a year, and the bill's failure suggested it would be difficult to get Republican support for the more expansive tax increases Obama has urged, making it less likely an agreement will be reached between the White House and Republicans before the end of the year.
Banking shares, which outperform in times of economic expansion and have led the market on signs of progress with the fiscal impasse, were among the hardest hit on Friday. Citigroup Inc sank 2.5 percent to $39.15 while Bank of America was off 2.5 percent to $11.23. The KBW Banks index lost 1.4 percent.
The Dow Jones industrial average was down 134.93 points, or 1.01 percent, at 13,176.79. The Standard & Poor's 500 Index was down 16.08 points, or 1.11 percent, at 1,427.61. The Nasdaq Composite Index was down 45.57 points, or 1.49 percent, at 3,004.82.
The S&P 500 is up about 1 percent on the week and 14 percent on the year, though uncertainty over the cliff may prompt many traders to lock in gains as the year draws to a close.