Obama pledge on tax cuts lifts US stocks

Stocks pared their losses today after President Barack Obama and Republican lawmakers promised to seek a compromise before the end of the year on extending Bush-era tax cuts.

The Dow recouped most of its losses and was down 25 points in afternoon trading. It had been down as many as 110 points earlier on concerns that Europe’s debt crisis was spreading.

Obama said while differences remain over how to address the expiring tax cuts, there was “broad agreement” that both parties can work together to resolve the issue.

Extending the tax cuts would motivate investors to hold stocks since they would not be subject to higher capital gains taxes next year. It would also encourage companies to continue paying dividends, which are taxed at a more favourable rate under the current tax cuts.

Investors were also encouraged by a jump in consumer confidence reported earlier today. The Conference Board said its index of consumer confidence jumped to a five-month high of 54.1 in November from 49.9 in October. It was better than analysts expected but still well below the level of 90 that indicates a healthy economy. The index has not been that high since the recession began in December 2007.

The euro briefly fell below 1.30 US dollars (84p) for the first time since mid-September after investors sold off government bonds from Spain, Portugal and Italy. A bailout of Ireland’s banks announced on Sunday has not been enough to assuage worries that other weak European countries will also need to be rescued.

The Dow Jones industrial average fell 24.67, or 0.2%, to 11,027.82 in afternoon trading.

The Standard & Poor’s 500 index fell 4.83 or 0.4%, to 1,182.93. The Nasdaq composite index dropped 24.63, or 1%, to 2,500.59.

Barring a significant turnaround, the Dow is on track to post its first monthly loss since August. The index is down 0.8% for the month. The S&P 500 is flat for November and the Nasdaq is down 0.3%.

Stocks had been on a nearly unbroken rise since late August, when the Federal Reserve first hinted at its plans to stimulate the economy by buying Treasury bonds. The Fed’s $600bn programme is aimed at encouraging borrowing by keeping interest rates low.

After climbing throughout September and October on hopes that the Fed’s plan would lift the economy, the Dow and other indexes have been falling since hitting 2010 highs on November 5, two days after the Fed announced its program. The Dow is down 3.5% since then; the S&P 500 3.2%.

Hugh Johnson, chairman and chief investment officer of Johnson Illington Advisors, said investors are concerned that the Fed’s stimulus efforts are being undone as the dollar strengthens, making US exports less attractive.

“The best laid plans are starting to go awry,” Johnson said.

A poor reading on US home prices was also keeping buyers at bay today. The Standard & Poor’s S&P/Case-Shiller index showed that home prices are falling faster in America’s largest cities. Eighteen of the 20 cities measured in the survey recorded price declines.

In corporate news, shares of Baldor Electric jumped 40.2% after the Fort Smith, Arkansas-based maker of industrial motors said it had agreed to be acquired by Zurich-based ABB for $63.50 a share.

BlackBerry maker Research in Motion rose 6.1% after a Jefferies analyst upgraded the company’s stock and gave high marks to its new mobile software. Google fell 2.8% after European regulators launched an investigation into whether the company abused its dominant position in the online search market. It was the first major probe into Google’s business practices.

Barnes & Noble fell 3.2% after reporting earnings that missed analysts’ expectations. Seagate Technology fell 3.6% after the disk drive maker said it had called off plans to go private after deciding the price being offered by a group of private equity firms was too low.

The dollar rose 0.4% against an index of six other heavily traded currencies.

Bond prices rose, pushing their yields lower. The yield on the 10-year Treasury note fell to 2.78% from 2.83% on Monday. That yield helps set interest rates on a wide variety of business and consumer loans including mortgages.

European markets were mixed. Britain’s FTSE fell 0.4% in afternoon trading. Germany’s DAX fell 0.1% and France’s CAC-40 fell 0.7%.

Asian markets fell on growing expectations that China will have to raise interest rates to keep inflation in check. Japan’s Nikkei fell 1.9% and Hong Kong’s Hang Seng fell 0.7%.