Stocks End Eight-Week Winning Streak With Tax Reform in Limbo

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So the stock market actually can go down.

U.S. equities posted the first weekly loss in more than two months as investors turned leery after congressional Republicans made little progress in passing tax cuts. Shares that would benefit most from a lower levy burden led declines, though selling spread to economically sensitive stocks as credit markets flashed warnings signs about the pace of growth.

“Doubt starts to creep into investors’ minds about what the tax plan is going to be,” said Mark Kepner, managing director and equity trader at Themis Trading LLC in Chatham, New Jersey, noting the market still looks good, regardless. “This week’s dip is a healthy retreat given the rally we’ve had so far.”

The S&P 500 Index slumped 0.2 percent in the five days, finishing at 2,582.3. The bulk of the losses came in the final two sessions after the gauge closed at a fresh record high Wednesday, six points shy of 2,600. Small caps in the Russell 2000 Index fell 1.3 percent for a third week of declines. The Cboe VIX Index rose 23 percent, the most since the five days ended Aug. 11.

The S&P 500’s failed run at a new round-number milestone added to selling pressure Thursday, as investors concerned about the prospects for tax cuts took the chance to get out of an equity market that has gone longer than ever without a slump of 3 percent. 

While analysts debate how much the market has priced in tax reform, stocks reacted to headlines indicating cuts might not be as deep or come as soon as expected. The Senate’s version issued Thursday departed in meaningful ways from the House’s, especially on the timing for corporate tax cuts. That exacerbated weakness in small caps, which are poised to benefit most from a corporate tax reduction.

Bank stocks also took a hit, ending the week down more than 4 percent, as lower corporate taxes that bolster investment would be boon to lenders. Adding to troubles for the banks was the flattest yield curve in a decade, which would wear on already weak interest income at the nation’s largest lenders. At the same time, high-yield corporate bonds tumbled in the week, with yields spiking for some of the riskiest debt. An exchange-traded fund that tracks junk debt had its worst week since August.

Even with the first decline in weeks, strategists underline the fact that this week was far from awful. The S&P 500, Nasdaq, and Dow Jones Industrial Average all hit fresh highs Wednesday, but with most U.S. companies done reporting earnings and almost all bears already having turned bulls, the market may be short of reasons to continue the upward march for now.

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