House Democrats pledged Thursday to reject the tax deal as it is currently written. The compromise reached by President Barack Obama and Republican leaders would extend tax cuts at all income levels for two years. House Democrats want tax rates for the wealthiest Americans to revert to their previous levels.
"There is a tremendous amount of uncertainty about some major tax planning and estate planning issues," said Eric Thorne, a vice president at Bryn Mawr Trust. "We think that the market will rally nicely once an agreement is passed one way or another."
The White House has been pushing Democrats to back the tax measure, arguing that a defeat could knock the economy back into recession. The deal also contains a provision extending unemployment benefits.
Economists expect the tax package to boost the U.S. economy and are already raising their estimates for economic growth next year. Goldman Sachs's rough estimate is that the tax proposal could add between 0.5 and 1 percentage point to economic growth in 2011. A stronger economy diminishes the appeal of ultra-safe investments, such as Treasuries, and raises the prospect of higher inflation.
Stocks had edged higher in the morning after a report from the Labor Department showed that first time claims for unemployment benefits dropped last week to the second-lowest level this year. Claims fell to 421,000, below the 428,000 figure that Wall Street expected.
The four-week average of claims also slid for the fifth straight week, reaching the lowest level since August 2008, before the darkest days of the financial crisis.
The Standard & Poor's 500 index inched higher. The index rose 4.72, or 0.4 percent, to 1,233. It was the second straight day that the S&P index reached a new high for the year.
The Dow Jones industrial average fell 2.42, or less than 0.1 percent, to 11,370.06. The Nasdaq composite index rose 7.51, or 0.3 percent, to 2,616.67.
Bank of America Corp. was the strongest performer among the 30 companies that make up the Dow. It rose up 5.4 percent. The index's laggard was McDonald's Corp., which lost 1.1 percent.
Eight of the 10 company groups in the S&P 500 index rose. Financial companies led the way with a 1.3 percent gain. Consumer discretionary companies were the weakest with a drop of less than 0.1 percent.
American International Group Inc. rose 13.2 percent, to $47.78. Trading in the insurance conglomerate's shares was interrupted Wednesday as the company announced it would repay a loan from the New York Federal Reserve, clearing the way for the government to shed its 80 percent stake. The government's bailout of AIG was at one point worth $182 billion.
Treasury prices rose slightly, causing their yields to drop, after getting crushed for two days straight. The yield on the 10-year note slipped to 3.21 percent. The yield, which help set rates for a variety of loans, reached as high as 3.33 percent Wednesday, the highest level in nearly six months.
The dollar remained flat against an index of six other major currencies.
Four stocks rose for every three that fell on the New York Stock Exchange. Consolidated trading volume came to 4.6 billion shares.