Stocks gain on hopes for a deal to avoid 'fiscal cliff'
Stocks gained on signs that lawmakers are edging toward a deal that would help the nation avoid the fiscal cliff.
Indexes shrugged off an early loss and rose in afternoon trading on Wednesday. The Dow Jones industrial average closed up 106.98 points at 12,985.11. It had been down as much as 112 points in early trading.
The Standard and Poor's 500 was up 10.99 points at 1,409.93. The Nasdaq composite rose 23.99 points to close at 2,991.78.
Huge tax increases and spending cuts will come into effect Jan. 1 if no deal on the federal budget is reached. Economists say the measures could push the country back into recession. President Obama said he believes both parties can reach a “framework” on a debt-cutting deal before Christmas, while House Speaker John Boehner told reporters that he's optimistic a deal could be reached, according news outlets including CNBC.
Craig Johnson, a Minneapolis-based technical market strategist at Piper Jaffray, said lawmakers realize that there is too much at stake to allow the deadline to pass.
“I don't think that anybody in Washington is going to do something so draconian, or so negative, that we're going to trigger a recession,” Johnson said. “There will be some compromise.”
Concern that the United States will go over the fiscal cliff has weighed on stocks since the Nov. 6 elections returned a divided government to power, with Obama staying in the White House and Republicans retaining control of the House.
Uncertainty about a possible increase in capital gains taxes has prompted investors to sell stocks, said Johnson.
As the third-quarter corporate earnings reporting period draws to a close, investors and traders have become increasingly fixated on the negotiations to cut the budget deficit.
Before Wednesday's gain, the market slumped on Tuesday as Senate Majority Leader Harry Reid said he was frustrated by the lack of progress in talks. The two moves canceled each other out, leaving both the Dow and the S&P 500 little changed for the week.
“We're all on pins and needles waiting for every bit of news, or rumors, coming out of Washington,” said Ryan Detrick, a Cincinnati-based technical analyst at Schaeffer's Investment Research. “That's what Wall Street is focused on. Everybody is watching the fiscal cliff.”
Many companies are making special end-of-year dividend payments or moving up their quarterly payouts because investors will have to pay higher taxes on dividend income starting in 2013, unless lawmakers reach a compromise on taxes and government spending.
Costco, the wholesale club operator, surged $6.07 to $102.58 as the company said it would pay a special dividend of $7 a share next month in addition to its regular quarterly dividend.
Las Vegas Sands Corp. rose 5.3 percent on Tuesday as the casino operator said it would distribute about $2.26 billion to shareholders before the end of the year. It rose another 1.3 percent on Wednesday, gaining 60 cents to $49.96.
With the market's attention focused on the outcome of the “cliff” negotiations, some investors caution that the weakness in third-quarter corporate earnings bodes poorly for the stock market.