Tax cuts make little difference to Dow

Wall Street today had little reaction to President George Bush’s proposal to cut taxes, as investors collected some profits from the market’s big three-day advance and left stocks narrowly mixed.

Analysts said the market had already factored in the proposed cuts during its rally. Downbeat outlooks from retailers and a disappointing report on factory orders also put pressure on stocks.

“The market had demonstrated such significant strength in the previous days that a more muted response (to the tax proposal) was probably not surprising. It also remains to be seen how much of the package will be passed by Congress and when,” said Lynn Reaser, chief economist and senior market strategist at Banc of America Capital Management. ”But the potential impact on the economy could be quite positive.”

The Dow Jones industrial average closed down 32.98, or 0.4%, at 8,740.59.

Analysts said the Dow’s drop was mostly due to investors cashing in profits following Monday’s 171-point gain and Thursday’s 265-point rally. Those gains gave the Dow its best performance for the first three trading days of a new year.

The broader market’s gauges were mixed. The Nasdaq composite index rose 10.25, or 0.7%, to 1,431.57. The Standard & Poor’s 500 index fell 6.08, or 0.7%, to 922.93.

Bush unveiled a proposal to slash taxes by 674 billion over 10 years. The two major elements called for the total elimination of the federal tax investors pay on their stock dividends and an immediate acceleration, retroactive to January 1, of the tax cuts previously scheduled to take effect in 2004 and 2006.

The Bush administration and much of Wall Street believe lower tax rates will spur investors to invest more money and prompt consumers to increase their spending.

“That is going to bolster support for the market,” said Chris Johnson, manager of quantitative analysis at Schaeffer’s Investment Research in Cincinnati, of the tax cut proposal.

The market was uneasy about a report from the Commerce Department that orders to US factories fell by 0.8% in November from the previous month, greater than the 0.6% decrease analysts were forecasting.

And the retailing sector was down on pessimistic earnings outlooks. Gymboree fell 1.98 to 13.92 and Tiffany declined 43 cents to 25.09 after each company lowered their fourth-quarter estimates.

Gymboree also cut its full-year estimate.

Furniture makers fell after Credit Suisse First Boston downgraded a string of them. LaZBoy, which also operates retail stores, declined 1.38 to 23.40.

Among gainers, EMC advanced 67 cents to 7.47 after the data storage company raised its fourth-quarter revenue projections.

Other winners included dividend-paying stocks, particularly blue chips. IBM soared 2.41 to 86 and Philip Morris climbed 1.62 to 41.13.

Declining issues outnumbered advancers nearly 9 to 5 on the New York Stock Exchange, where volume was moderate.

The Russell 2000 index, the barometer of smaller company stocks, fell 3.05, or 0.8%, to 393.95.