1,419.83. The Nasdaq Composite Index dropped 22.44 points, or 0.74 percent, to 2,990.16.
J.C. Penney Co was a notable exception to the weakness in retail stocks, surging 4.4 percent to $20.75 as the S&P 500's biggest gainer. It was followed closely by Bank of America and Genworth Financial, which gained 3 percent on the day and 35.5 percent on the year.
"People want to show they own names like these, making them prime 'window dressing' candidates," said Wayne Kaufman, chief market analyst at John Thomas Financial in New York.
"Bank of America keeps going up even though it's overbought
and you'd expect a pullback at these levels. No one wanted it when it was under $10 a share, but they want it now." Volume was light, with only 3.96 billion shares having traded on the New York Stock Exchange, the Nasdaq and the NYSE MKT. Many senior traders were still on vacation during this holiday-shortened week and major European markets were closed for the day.
The S&P 500 has fallen 1.5 percent over the past three sessions, the worst three-day decline since mid-November. The Dow Jones Transportation Average, viewed as a proxy for business activity, fell 0.6 percent.
A Republican plan that failed to gain traction last week triggered the S&P 500's recent drop, highlighting the market's sensitivity to headlines centered on the budget talks.
During the last five trading days of the year and the first two of next year, it's possible for a "Santa rally" to occur.
Since 1928, the S&P 500 has averaged a gain of 1.8 percent during that period and risen 79 percent of the time, according to data from PrinceRidge.
"While it's unlikely there could be a budget deal at any time, no one wants to get in front of that trade," said Conifer's Fier, who helps oversee about $12 billion in assets.
"Investors can easily make up for any gains when there's more action in 2013."
Data showed U.S. single-family home prices rose in October, reinforcing the view that the domestic real estate market is improving, as the S&P/Case-Shiller composite index of 20 metropolitan areas gained 0.7 percent in October