Stocks Thumped by Fed's Disclosure on Stimulus

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The Democrats have indicated they will continue to demand a balanced approach with more tax increases for any agreed-to cuts in spending.

"Given the track record of the current Washington crew, we can be sure we will go right to the brink and flirt with default before we reach yet another piecemeal accord," said Coronado. "As in 2011, the battle over the debt ceiling will likely end with a downgrade of the U.S., this time from Fitch and Moody's sometime in Q2."

Major U.S. stock averages roared Wednesday, with the Dow soaring more than 300 points, as global risk appetite surged on the first trading day of the year after the House managed to pass the Senate's 11th-hour agreement on averting the fiscal cliff.

The International Monetary Fund said Wednesday that while it welcomes the actions by the U.S. Congress to avoid sudden tax increases and spending cuts, more needs to be done to put U.S. public finances back on a sustainable path without harming the still-fragile recovery. Specifically, a comprehensive plan that ensures both higher revenue and containment of entitlement spending over the medium term should be approved as soon as possible, the IMF said.

The IMF also said it is crucial that the U.S. is able to raise the debt ceiling "expeditiously" and remove remaining uncertainties about the spending sequester and expiring appropriation bills.

Better-than-anticipated employment data were released Thursday, pointing to upside risks to Friday's key government nonfarm payrolls report. Payroll processor ADP said that 215,000 jobs were added in December, compared with an upwardly revised 148,000 the prior month. Economists, on average, expected ADP to report a gain of 133,000 jobs in December.

"Private sector employment held up remarkably well in December, despite concerns over the fiscal cliff and the tax increases related to the Affordable Care Act," said Dan Greenhaus, chief global strategist at BTIG.

Greenhaus noted that in the December report, and since 2010, small businesses have been trailing large business in adding jobs perhaps in connection to the impact of the health-care law, increased regulation and credit availability. "The lack of meaningful gains among this category (small business) partially speaks to why job growth has been relatively anemic."

The Labor Department reported that initial jobless claims for the week ended Dec. 29 increased by 10,000 to 372,000 from the prior week's upwardly revised 362,000.

"We have to be careful not to read too much into year-end/turn-of-the-year claims data because of volatility associated with shifting holidays and seasonality that is not necessarily adequately adjusted for by the usual statistical procedures," said John Ryding and Conrad DeQuadros, the founders of research firm RDQ Economics.

Gold for February delivery declined Thursday by $14.20 to settle at $1,674.60 an ounce at the Comex division of the New York Mercantile Exchange, while February crude oil contracts fell 21 cents at $93.34 a barrel.