Stocks erase gain as optimism about Fed stimulus fades

An early rally Wednesday faded after Fed Chairman Ben Bernanke announced new spending plans to stabilize the economy and warned of the risks associated with the "fiscal cliff."

The Dow Jones Industrial Average, up more than 80 points in early trading, finished with a loss of 2.99 points to 13,245.45, snapping a five-session winning streak. The Nasdaq Composite Index dropped 8.49 points to 3,013.81, and the S&P 500 Stock Index gained 0.64 point to 1,428.48.

The Federal Reserve announced it will keep short-term interest rates near zero until the U.S. unemployment rate drops to 6.5 percent. The rate currently stands at 7.7 percent. The announcement is a new explanation of the Fed's policy to keep rates low through 2015.

Despite an unexpected increase in oil reserves, crude closed higher at $86.77 a barrel, up 98 cents. Gold rose $8.30 to $1,717.90 an ounce.

“Traders have been poking holes in some of the Fed comments,” said Michael James, a managing director of equity trading at Wedbush Securities Inc. in Los Angeles, in an email. “Nothing hugely ‘negative,’ just reason to be doing some selling with the strength we’ve had in the last couple days. Markets are very thin right now and subject to bigger swings this week.”

Stocks rallied after the central bank said it will buy $45 billion a month of Treasury securities starting in January, in addition to $40 billion a month of mortgage-debt purchases, as part of its effort to stimulate the economy. Asset buying will continue “if the outlook for the labor market does not improve substantially,” the Federal Open Market Committee said Wednesday at the conclusion of a two-day meeting in Washington.

President Barack Obama is seeking a deal with Republican lawmakers to avoid the fiscal cliff, lowering his demand for tax increases in the budget to $1.4 trillion from $1.6 trillion Tuesday. House Speaker John Boehner said that Obama’s revenue demand can’t pass the House or the Senate. Democrats and Republicans remain divided on taxes and spending, as well as on whether an agreement should include an increase in the debt limit and further programs to boost the economy.

“People finally realized that we still have the fiscal cliff waiting in the wings,” said Thomas Garcia, head of equity trading at Santa Fe, N.M.-based Thornburg Investment Management Inc., in an email. His firm oversees about $80 billion. What the Fed “said in the minutes should be bullish for equities,” he said.

The S&P 500 will surpass its record to reach 1,580 at the end of next year, according to Thomas Lee, chief U.S. equity strategist at JPMorgan Chase & Co. (NYSE: JPM). His forecast is 0.9 percent higher than the benchmark equity measure’s all-time high of 1,565.15 and 11 percent above its closing level Tuesday. Stocks will rally as investors get clarity on political concerns in the United States and Europe, as an acceleration in durable goods spending lifts price-earnings multiples, and as earnings growth picks up, according to Lee.

Phone, financial and energy companies had the biggest gains among 10 industry groups, adding at least 0.4 percent. Technology, consumer staples and material stocks posted the largest losses, falling more than 0.2 percent each.

Berkshire Hathaway Inc. (NYSE: BRK.B) climbed 2.4 percent to $89.32. The company said it will pay as much as 120 percent of book value, a measure of assets minus liabilities for stock buybacks. The limit was 110 percent. Chief Executive Officer Warren Buffett and Vice Chairman Charles Munger have been weighing buybacks as the company seeks to deploy part of its $47.8 billion cash hoard. Berkshire last year began a buyback program after shunning repurchases for four decades.

DuPont Co. (NYSE: DD) climbed 1.4 percent to $44.30. The biggest U.S. chemical maker by market value said 2012 earnings will reach the upper end of the company’s forecast and it will spend as much as $1 billion to repurchase shares. Earnings excluding one-time items will approach $3.30 a share this year and increase by the “low- to mid-single digits” for 2013, DuPont said.

Bloomberg News contributed to this report.

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