US stocks extend losses on 'cliff' fears
US stocks extended losses, with the Nasdaq briefly dropping 1 per cent, as investors recalibrated for upcoming negotiations over the "fiscal cliff," which overshadowed a batch of positive economic data.
Investors worry that if no deal is reached in Congress over some $USUS600 billion in spending cuts and tax increases due to kick in early next year, it could derail the US economic recovery and lead to a recession.
Data released on Thursday showed a better-than-expected drop in initial jobless claims and a rise in exports, news that had earlier been expected to bolster equity markets after steep declines a day earlier.
The three major US indexes shed more than 2 per cent Wednesday as investor focus returned to Europe's economic troubles and the looming fiscal cliff following the re-election of President Barack Obama.
Anticipated haggling over spending cuts and taxes has added a layer of uncertainty for investors, who have sold stocks that may leave them susceptible to higher taxes on dividends.
"How does an investor adapt to the new tax regime and the potentially lower after-tax return on some of these assets, some of these stocks? They react by selling," said Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama.
While a comprehensive legislative agreement to avoid the fiscal cliff was possible, the more likely scenario would be for political leaders to find a temporary fix in order to buy time until a new Congress and the re-elected president are sworn in at the start of the new year.
Data showed the US trade deficit narrowed in September as exports rose while jobless claims dropped, although last week's damaging storm along the US East Coast may have distorted the data.
An analyst from the Labor Department said Hurricane Sandy boosted claims in some states by leaving people out of work, but reduced claims in at least one state because power outages kept it from collecting claim reports.
McDonald's Corp dropped 2 per cent to $USUS85.11 as one of the Dow's worst performers after the world's largest hamburger chain reported a 1.8 per cent drop in October sales at established restaurants around the world, its first monthly sales fall since March 2003.
The Dow Jones industrial average dropped 74.73 points, or 0.57 per cent, to 12,858. The Standard & Poor's 500 Index lost 10.64 points, or 0.76 per cent, to 1,383.91. The Nasdaq Composite Index fell 25.19 points, or 0.86 per cent, to 2,912.08.
The S&P 500 bounced off its 200-day moving average of 1,380.74, but managed to find support around that key level.
Wednesday's retreat marked the biggest daily drop for the S&P 500 since June 1. Despite that selloff, the benchmark S&P 500 is still up nearly 10 per cent so far this year.
Qualcomm Inc, was a bright spot, up 6 per cent at $USUS61.61 as the biggest boost to both the S&P 500 and the Nasdaq 100 after the leading supplier of chips for cell phones reported quarterly revenue Wednesday that beat expectations.
Whole Foods Market Inc reported earnings that met expectations, but said Sandy was a drag on sales this quarter. Its shares slid 5 per cent to $USUS91.17.
According to Thomson Reuters data through Thursday, of the 440 companies in the S&P 500 that have reported earnings, 63.4 per cent have topped analysts' expectations, slightly above the 62 per cent average since 1994, and the 67 per cent beat rate over the past four quarters.
But revenue results remain disappointing, with only 37.6 per cent of companies topping expectations - well below the 62 per cent average since 2002, and the 55 per cent beat rate over the past four quarters.
The European Central Bank held its main interest rate at 0.75 per cent despite dovish comments on Wednesday from ECB President Mario Draghi that had stirred market rumors of a rate cut. The US dollar's rise also weighed on stocks on Wednesday.
Europe will keep the pressure on equities. Draghi said the ECB cannot do much more to help Greece with its debt burden, and gave Spain none of the assurance it wants that ECB bond buying will lower its borrowing costs.