Stocks soar on budget deal, but problems lurk

The Associated PressJanuary 3, 2013 

— The “fiscal cliff” compromise, even with all its chaos, controversy and unresolved questions, was enough to ignite the stock market on Wednesday, the new year’s first trading day.

The Dow Jones industrial average careened more than 300 points higher, its biggest gain since December 2011. It’s now just 5 percent below its record high close reached in October 2007. The Russell 2000, an index that tracks smaller companies, shot up to the highest close in its history.

The reverie multiplied across the globe, with stock indexes throughout Europe and Asia leaping higher. A leading British index, the FTSE 100, closed above 6,000 for the first time since July 2011.

In the U.S., the rally was extraordinarily broad. For every stock that fell on the New York Stock Exchange, roughly 10 rose. Technology stocks rose the most. U.S. government bond prices fell sharply as investors pulled money out of safe-harbor investments. And the VIX, an index that measures investors’ expectations of future market volatility, plunged more than 18 percent to 14.68, the lowest close since October.

The very last week of each year and the first two days of the new year usually average out to a gain for U.S. stocks. But this year stood out. From 2008 to 2012, the Dow rose an average of 93 points on the first trading day of the year, less than a third of Wednesday’s gain of 308.41. During that period the Dow fell on the first trading day of the year only once, in 2008.

Despite the euphoria, many investors remained cautious. The deal that politicians hammered out merely postpones the country’s budget reckoning, they said, rather than averting it.

The House passed the budget bill late Tuesday night, a contentious exercise because many Republicans had wanted a deal that did more to cut government spending. The Senate had already approved the bill.

The late-night haggling was a product of lawmakers wanting to avert a sweeping set of government spending cuts and tax increases.

The Dow enjoyed big gains throughout the day, up by more than 200 points within minutes of the opening bell. It swelled even bigger in the final half hour of trading, and closed up 2.4 percent to 13,412.55.

The Standard & Poor’s 500 jumped 36.23, or 2.5 percent, to 1,462.42. The Nasdaq rose 92.75, or 3.1 percent, to 3,112.26.

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