Stocks Sink on Tax Worries

U.S. equities fell on Thursday amid doubts over the fate of the GOP’s tax cut plans. The doubt hit investors after a number of Republican senators expressed reservations about the amount of the child tax credit.

In the end, the Dow Jones Industrial Average lost 0.3%, the S&P 500 lost 0.4%, the Nasdaq Composite lost 0.3% and the Russell 2000 lost 1.2%. Treasury bonds were weaker, the dollar outperformed, gold gained 0.7% and crude oil added 0.8%.

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Breadth was negative, with decliners outpacing advancers by a ratio of 1.9 to 1 and NYSE volume at 97% of the 30-day average.

Consumer discretionary stocks led the way with a gain of 0.3%, while materials were the laggards, down 1.1%. Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) gained 10.2% after announcing an aggressive restructuring plan to reduce its cost pace and streamline operating. Twenty-First Century Fox Inc Class A (NASDAQ:FOXA) gained 6.5% after Walt Disney Co (NYSE:DIS) confirmed a $52 billion deal to buy multiple assets, including film studios and regional sports networks.

On the downside, Pier 1 Imports Inc (NYSE:PIR) fell nearly 30%, erasing recent gains after reporting weaker-than-expected quarterly results on aggressive promotional activity. Valeant Pharmaceuticals Intl Inc (NYSE:VRX) lost nearly 11% after being downgraded to underweight at JPMorgan on valuation concerns and worries about patent erosion.

Turning back to taxes, a reconciled House and Senate bill is expected to be released on Friday, keeping Republicans on track to pass the bill and deliver it to President Trump sometime before Christmas. While leadership is optimistic that the votes are there, last-minute complications arose focusing on the expanded child tax credit.

Conclusion

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Aside from the admittedly low risk the GOP doesn’t get a deal done on taxes before the holiday — which would be mind boggling at this point given the political capital at stake — investors had a few other reasons to be concerned today.

China’s central bank tightened policies overnight by raising interest rates by 0.25% — mimicking the move by the Federal Reserve on Wednesday. That rattled the Shanghai Composite, which fell 0.3% in overnight trading and it remains well off of the highs set in November.

European issues were weak as well after the European Central Bank increased its inflation forecasts, setting the stage for a tapering of its bond buying stimulus program. This is a big deal, since the fixed income markets in Europe are beyond frothy with many questionable corporate euro bonds trading at yields below U.S. Treasuries.

As evidence of possible concern creeping into Wall Street’s psyche, the CBOE Volatility Index has become correlated with stock prices, rising in what looks like a bet stock prices could take a dramatic turn lower after New Year’s Day.

Today’s Trading Landscape:

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

Anthony Mirhaydari is the founder of the Edge (ETFs) and Edge Pro (Options) investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.

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