Stocks edged lower on Thursday as investors continued to adjust for upcoming negotiations over the "fiscal cliff," which overshadowed a batch of positive economic data.
Investors worry that if no deal is agreed in Congress over some $600 billion in spending cuts and tax increases due to kick in early next year, it could derail the U.S. economic recovery.
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Data released Thursday showed a better-than-expected drop in initial jobless claims and a rise in exports, news that had earlier been expected to bolster equity markets after steep declines a day earlier.
The three major U.S. indexes shed more than 2 percent Wednesday as investor focus returned to Europe's economic troubles and the looming fiscal cliff following the electoral victory of President Barack.
Anticipated haggling over spending cuts and taxes has added a layer of uncertainty for investors, who have sold stocks that may leave them susceptible to higher taxes on dividends.
"How does an investor adapt to the new tax regime and the potentially lower after-tax return on some of these assets, some of these stocks? They react by selling," said Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama.
"That seems to be the operative theme in the market this morning."
Data showed the U.S. trade deficit narrowed in September as exports rose while jobless claims dropped, although last week's damaging storm along the U.S. East Coast may have distorted the data.
An analyst from the Labor Department said Hurricane Sandy boosted claims in some states by leaving people out of work but reduced claims in at least one state because power outages kept it from collecting claim reports.
McDonald's Corp dropped 1.2 percent to $85.82 as one of the worst performers on the Dow after the world's largest hamburger chain reported a 1.8 percent drop in October sales at established restaurants around the world, its first monthly sales fall since March 2003.
The Dow Jones industrial average dropped 20.48 points, or 0.16 percent, to 12,912.25. The Standard & Poor's 500 Index lost 3.01 points, or 0.22 percent, to 1,391.52. The Nasdaq Composite Index fell 9.61 points, or 0.33 percent, to 2,927.68.
Wednesday's retreat marked the biggest daily drop for the S&P 500 since June 1. Despite that selloff, the benchmark S&P 500 is still up nearly 11 percent so far this year.
Qualcomm Inc , was a bright spot, up 6.8 percent to $62.08 as the biggest boost to both the S&P and Nasdaq 100 after the leading supplier for chips for cellphones reported quarterly revenue Wednesday that beat expectations.
Whole Foods Market Inc reported earnings that met expectations, but said Sandy was a drag on sales this quarter. Its shares fell 4.3 percent to $91.81.
The European Central Bank held its main interest rate at 0.75 percent despite dovish comments Wednesday from ECB President Mario Draghi that stirred market rumors of a rate cut. A rise in the U.S. dollar also weighed on equities Wednesday.
Equities will continue to be pressured by Europe. The euro zone economy shows little sign of recovering before the year-end despite an easing of financial market conditions, Draghi said.
(Editing by Bernadette Baum)