Budget impasse whipsaws stocks

Friday, December 28, 2012

— Small developments in Washington’s tense budget standoff yanked stocks back and forth Thursday.

In the end, U.S. stocks closed lower for the fourth day in a row, sending the unwelcome message that the budget standoff is still far from solved, the economy still far from healed.

Automatic tax increases and government spending cuts will kick in next week if Republicans and Democrats can’t reach a budget agreement by Monday night.

Stocks opened by hopping between small gains and losses, pulled up by news about fewer unemployment claims and down by the continuing lack of a budget deal in Washington.

Stocks turned decisively downward at midmorning, unnerved by a report that consumer confidence fell to its lowest level since August, and a warning from the Senate Majority Leader, Democrat Harry Reid, that he feared that the government would miss the Monday night deadline for working out a budget compromise.

A bright spot of economic news, an increase in sales of new homes, couldn’t distract investors from worries about the budget impasse.

Republicans and Democrats demanded that the other party take the initiative in compromising. The Dow Jones industrial average fell as much as 150 points, more than 1 percent.

Then, just as the Dow appeared headed toward a triple-digit loss, it changed direction again, rising after House leaders announced in the late afternoon that the chamber would meet Sunday evening to work on the budget.

At the close, stocks trimmed their losses but still closed lower. The Dow finished down 18.28 points to 13,096.31. The Standard & Poor’s 500 index fell 1.73 to 1,418.10. The Nasdaq composite index lost 4.25 to 2,985.91.

Slightly more stocks fell than rose on the New York Stock Exchange. Consolidated volume was below average at 2.8 billion shares.

Light volume can make the market more volatile.

When fewer shares are changing hands, relatively small trades can move the overall market.

Until recently, investors were treating the “fiscal cliff” with a measure of nonchalance. Stocks rose more or less steadily from mid-November until late last week.

But now, with the “fiscal cliff” deadline just days away and no deal in sight, more investors are paying attention.

“This is a matter of a few personalities; it isn’t something where you can analyze spreadsheets to figure out what’s going on,” said David Kelly, chief global strategist at JPMorgan Funds. “There are very few investors on one side or the other who have wanted to make a strong bet on this one.”

Many investors believe that the higher taxes and lower government spending could push the U.S. back into recession.

“This is not small potatoes,” said Hugh Johnson, chairman and chief investment officer of Hugh Johnson Advisors in Albany, N.Y. “We’re not going to miss a recession by much in 2013 as is.”

Business, Pages 22 on 12/28/2012