U.S. Stocks Erase Gains On Bernanke Talk

U.S. stocks finished little changed Wednesday after Federal Reserve Chairman Ben Bernanke warned the Fed does not have the ability to shield the economy from the fiscal cliff.

Stocks had jumped to session highs after the central bank said it would add further stimulus, only to reverse into negative turf as Bernanke address a news conference, taking questions that largely focused on the automatic and steep spending cuts and tax increases that start in January should politicians fail to reach a budget deal.

“We cannot offset the full impact of the fiscal cliff — it’s just too big,” said Bernanke, who also said he believed a deal to avert the cliff would be reached.

Bernanke’s comments came after the U.S. central bank said it would add $45 billion in Treasury-note purchases to its $40 billion-a-month purchases of mortgage-backed bonds, and would keep official rates near zero so long as the jobless rate remains above 6.5% and inflation is not forecast to rise above 2.5%.

“I’m not surprised by the lack of a change in interest rates, and I’m not surprised by the continued buyback, but I am extremely surprised by the tying it [interest-rate policy] to the unemployment rate, as I don’t know how you even put those two together,” said Chip Cobb, portfolio manager at BMT Asset Management in Bryn Mawr, Pa.

“Investors are trying to shake out what it really means, but I don’t think the market understands it for one, and two, [the market] is still clearly focused on Jan. 1 and what that means,” added Cobb of the fiscal cliff.

Halting a five-session winning run, its longest since March, the Dow industrials  declined 2.99 points to 13,245.45.

Dow gainers included DuPont , which rose 1.4% after the chemicals company said it would repurchase as much as $1 billion of its shares in 2013 and that 2012 profit would come in at the high end of its outlook.

The S&P 500 Index  retained a 0.64-point gain to end at 1,428.48.

Aetna Inc.’s  shares rallied 3.2%, a day after the health insurer projected earnings growth of about 6% next year.

The Nasdaq Composite Index  fell 8.49 points, or 0.3%, to 3,013.81.

Decliners edged past advancers on the New York Stock Exchange, where 695 million shares traded. Composite volume neared 3.7 billion.

The U.S. dollar  and Treasury notes fell, with the yield on the 10-year note  rising to 1.707%.

A day after conferring by phone with President Barack Obama, House Speaker John Boehner on Wednesday said the president’s revenue demand would not pass Congress.

Later Wednesday, White House spokesman Jay Carney said the president continues to believe a deal to avert the fiscal cliff is possible by the end of the year. But Carney said Republican leaders have given “no indication” that they would agree to higher taxes for the wealthiest 2%.

“You see a lot of gamesmanship, but it looks on the surface like we’re going to see some increases in taxes,” said Bruce Bittles, chief investment strategist at Robert W. Baird & Co., who believes a budget deal will be reached by the end of the year. “Everything is so politicized now, it’s hard to get your arms around what is real and not real, but the market is assuming nothing much is going to happen here.”

Obama has cut his demand for $1.6 trillion in additional revenue from taxing wealthy Americans to $1.4 trillion over a decade. The president’s figure remains $600 billion above the Republican’s stance.

“Based on continued views of the [CBOE Volatility Index], it still looks like the market expects a deal, and you keep hearing mildly positive comments, if not from Washington, then certainly from a lot of the business leaders and money managers, who feel there is a chance of a mild resolution before the year is done,” Cobb said.

Marketwatch