By Rodrigo Campos
NEW YORK (Reuters) - Stocks fell on Thursday as retail sales rose solidly in November, adding to signs the economy is strong enough for the Federal Reserve to begin reducing the pace of monetary stimulus.
Profit-taking also played a part in the market's decline, with investors selling some stocks to lock in gains from this year's rally. The S&P 500 is set to close its strongest yearly performance in more than a decade.
"Year-end activity is clouding reactions to some economic news," said Drew Wilson, an analyst at Fenimore Asset Management in Cobleskill, New York.
He said the market is "taper-schizophrenic" as it tries to second-guess the Fed's reaction to recent economic data.
"I'm not sure the market knows how to react to good and bad news."
The Dow Jones industrial average <.DJI> fell 104.10 points or 0.66 percent, to end at 15,739.43. The S&P 500 <.SPX> lost 6.72 points or 0.38 percent, to finish at 1,775.50. The Nasdaq Composite <.IXIC> dropped 5.41 points or 0.14 percent, to close at 3,998.403.
Many market participants have expected the Fed to announce a cut in its $85 billion a month in bond purchases in March, but that timeline may have shortened after Friday's better-than-expected November payrolls report and Tuesday's initial agreement in Washington on a bipartisan budget.
Other markets also reacted to the perception of a shorter timeline for the Fed's tapering of its bond-buying stimulus. The U.S. dollar rose 0.4 percent against a basket of major currencies <.DXY> and spot gold slid 2 percent.
The Fed's policy-setting committee is scheduled to meet for the last time this year on Tuesday and Wednesday.
The market is expected to be more volatile ahead of the Fed meeting. The CBOE Volatility Index <.VIX> closed on Thursday at 15.54, its highest since October 15, and the options market showed a trader purchased 40,000 call options at the 22 strike. The VIX has not traded above 22 this year, though it brushed against that level in June in the wake of a Fed announcement.
Data showing the biggest jump in a year in initial claims for unemployment benefits was mostly ignored as figures were skewed by adjustments for the season and other factors.
Lululemon Athletica Inc
Investors also dealt with a flurry of initial public offerings, including Hilton Worldwide Holdings Inc
Food services provider Aramark Holdings Corp
Shares of J.C. Penney
Decliners beat advancers on the NYSE by a ratio of about 7 to 5. On the Nasdaq, winners and losers were almost evenly distributed.
About 6.2 billion shares changed hands on U.S. exchanges, slightly above the 6.1 billion average so far this month, according to data from BATS Global Markets.
(Reporting by Rodrigo Campos; Editing by Kenneth Barry and Jan Paschal)