S&P 500 drops most in a month as budget deal spurs stimulus bets

U.S. stocks fell a second day, giving the Standard & Poor’s 500 Index (CME:SPZ13) its biggest back-to-back drop in two months, as a congressional budget accord fueled speculation the Federal Reserve could trim stimulus next week.

The S&P 500 dropped 1.1% to 1,782.05 at 4 p.m. in New York, extending its two-day slide to 1.5% from a record on Dec. 8. Today’s retreat was the biggest since Nov. 7.

“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 fell 0.3% 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% from its bear-market low in 2009. The index has rallied 25% this year and is challenging 2003 for the biggest annual jump since 1998.

Investors are considering when the central bank, which meets next week, will 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.

Budget Deal

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.

Fitch Ratings said the proposal signals “an improvement in the functioning of budget policy making” and suggests a reduced risk that political brinkmanship will cause another government shutdown or debt ceiling crisis.

“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.”

Data Watch

The deal comes after data last week showed the jobless rate fell to a five-year low and the U.S. economy expanded in the third quarter at a rate faster than initially estimated. Data later this week on retail sales, initial jobless claims and producer prices will provide clues on whether growth is strong enough for the Fed to curb stimulus measures.

The Federal Open Market Committee will probably start slowing its $85 billion in monthly bond purchases at its Dec. 17-18 meeting, according to 34% of economists surveyed Dec. 6 by Bloomberg, an increase from 17% in a Nov. 8 survey. Nine of the 35 economists surveyed said the central bank will buy fewer bonds from its January meeting and the remaining 14 predicted that tapering will start in March.

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