Stocks pared their losses 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 on Tuesday. It had been down as many as 110 points earlier on concerns that Europe’s debt crisis was spreading.
Mr 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 600 billion US dollar (£386bn) 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%.