U.S. Stocks Drop as Budget Deal Spurs Bets on Fed Cuts

According to Bloomberg,

U.S. stocks fell a second day, after an all-time high for the Standard & Poor’s 500 Index, as a Congressional budget accord fueled speculation that the Federal Reserve could trim stimulus next week.

Cisco Systems Inc. dropped 2.2 percent after losing a European Union court bid to overturn approval of Microsoft Corp.’s 2011 takeover of Skype Technologies SA. Laboratory Corp. of America Holdings plunged 10 percent after issuing a profit forecast below analysts’s estimates. MasterCard Inc. (MA) climbed 3.8 percent after saying its board of directors approved an 83 percent dividend increase and a 10-for-1 stock split.

The S&P 500 fell 0.7 percent to 1,790.90 at 11:58 a.m. in New York. The Dow Jones Industrial Average dropped 75.48 points, or 0.5 percent, to 15,897.65. Trading in S&P 500 stocks was in line with the 30-day average at this time of day.

“We’ve moved much closer for the Fed to taper in December,” Jeffrey Kleintop, chief market strategist at LPL Financial LLC in Boston, said in a telephone interview. “Markets are increasing their views that we are a week or so away from tapering because of improving economic data and clearing the hurdle for a budget deal. This deal is great, it’s a positive, but also a negative because it could prompt the Fed to taper sooner.”

The S&P 500 (SPX) fell 0.3 percent yesterday after reaching a record 1,808.37 the day before. Fed stimulus has helped propel the benchmark gauge higher by as much as 167 percent from its bear-market low in 2009. The index has rallied 26 percent this year and is challenging 2003 for the biggest annual jump since 1998.

Budget Deal

Investors are considering when the central bank, which meets next week, may reduce the pace of its monthly bond buying. Fed officials cited the drag from fiscal policy in their Oct. 30 statement and Jeffrey Lacker, president of the Richmond Fed, said in a speech Dec. 9 that budget uncertainty is weighing on business investment decisions.

Congressional negotiators yesterday agreed to a budget deal that would ease automatic spending cuts by about $60 billion over two years and will reduce the deficit by $20 billion to $23 billion. The budget compromise, which needs to pass both chambers of Congress, doesn’t raise the U.S. debt limit, setting up another potential fiscal showdown after February.

“The budget deal itself is at best a signal that we won’t shut the government down at the start of the new year,” Alexander Friedman, chief investment officer at UBS AG’s wealth-management unit, told Anna Edwards on Bloomberg Television. “It’s a low base that we’re declaring victory from. The key message for 2014 is the real economy is getting better. For investors however, it’s probably not going to be the same sugar high we’ve seen for the last five years.”

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