Wall Street rebounds as government shutdown seen short-lived

NEW YORK Tue Oct 1, 2013 6:35pm EDT

1 of 2. Traders work on the floor of the New York Stock Exchange, October 1, 2013.

Credit: Reuters/Brendan McDermid

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NEW YORK (Reuters) - U.S. stocks kicked off a new month and a new quarter with gains on Tuesday as investors, for now, appeared confident that the first partial government shutdown in nearly two decades would be short-lived.

After declining seven out of the past eight sessions on concerns about a possible shutdown, Wall Street rebounded on Tuesday as investors viewed the pullback as a buying opportunity in the absence of an extended shutdown.

Trading volume totaled about 6 billion shares on the New York Stock Exchange, the Nasdaq and the NYSE MKT, lower than the average daily closing volume of about 6.3 billion this year.

Congress missed a midnight deadline to agree on a spending bill, resulting in up to 1 million workers being put on unpaid leave. A fight over President Barack Obama's healthcare law was at the center of the impasse.

The Democratic-led U.S. Senate on Tuesday voted to kill Republicans' latest attempts to modify an emergency government funding bill, stripping proposed amendments from the spending bill and sending back to the House a "clean" bill that would fund government agencies until November 15.

"This time around, the markets have been so blissfully unconcerned that this hasn't been a problem. It could start to bite now, of course. But for me, the main story is the number of people not receiving paychecks or producing output," said Eric Lascelles, chief economist at RBC Global Asset Management in Toronto.

Lascelles said he estimates that each week the shutdown persists will shave about 0.1 percentage point from fourth-quarter GDP.

The Dow Jones industrial average .DJI was up 62.03 points, or 0.41 percent, at 15,191.70. The Standard & Poor's 500 Index .SPX was up 13.45 points, or 0.80 percent, at 1,695.00. The Nasdaq Composite Index .IXIC was up 46.50 points, or 1.23 percent, at 3,817.98.

In the latest economic data, the Institute for Supply Management's manufacturing index came in at 56.2, up from the previous month and above expectations for a reading of 55.

But with the closure of federal government agencies, the release of a report on construction spending in August was delayed. If no deal is reached by Friday, the closely watched payroll report will also be delayed.

The report on private sector hiring in September by payrolls processor Automatic Data Processing will be released on Wednesday at 8:15 a.m. (1215). Weekly initial jobless claims data due on Thursday will also be released as scheduled.

"We are thinking that it may go two weeks and get close to the October 17 date. Then the whole thing ratchets up in intensity. The debt limit fight and the budget fight are related in a way, so they provide each side with more pressure points," said David R. Kotok, chief investment officer at Cumberland Advisors, in Sarasota, Florida.

Supporting the Nasdaq, shares of Apple Inc (AAPL.O) rose 2.4 percent to $487.96 on news that billionaire activist investor Carl Icahn "pushed hard" for a share buyback when he had dinner with Apple chief executive Tim Cook on Monday.

The U.S. Department of Justice, which is fighting a proposed merger of US Airways Group Inc LCC.N and American Airlines parent AMR Corp (AAMRQ.PK), asked a judge on Tuesday to postpone a trial in the case, saying the shutdown would prevent its staff from working. Shares of US Airways were up 3.9 percent at $19.69 while AMR rose 8.3 percent to $4.45.

Merck & Co (MRK.N) announced a plan to cut annual operating costs by $2.5 billion by the end of 2015 and eliminate 8,500 jobs. Shares rose 2.4 percent to $48.74, one of the biggest boosts to the S&P 500.

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.

Investors were also eyeing the tone of negotiations as a possible template for the upcoming debate on lifting the debt ceiling in mid-October, which could result in a default on U.S. debt if not passed. The debt limit issue is considered to have a bigger impact on markets.

(Additional reporting by Steve C. Johnson; Editing by Nick Zieminski)