'Cliff' Deal Sends Stocks Up, But Problems Lurk

New York Stock exchangeBy CHRISTINA REXRODE

NEW YORK (AP) - The "fiscal cliff" compromise, even with all its chaos, controversy and unresolved questions, was enough to ignite the stock market on Wednesday, the first trading day of the new year.

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.

"Washington negotiations remind me of the Beach Boys song, 'We'll have fun, fun, fun 'til her daddy takes the T-Bird away," Jack Ablin, chief investment officer of BMO Private Bank in Chicago, wrote in a note to clients.

"Nothing got solved," added T. Doug Dale, chief investment officer for Security Ballew Wealth Management in Jackson, Miss.

According to these and other market watchers, investors were celebrating Wednesday not because they love the budget deal that was cobbled together, but because they were grateful there was any deal at all.

"Most people think that no deal would have been worse than a bad deal," said Mark Lehmann, president of JMP Securities in San Francisco.

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 that kicked in Tuesday, the start of the new year, because there was no budget deal ready. The scenario came to be known as the fiscal cliff, because of the threat it posed to the fragile U.S. economic recovery.

The bill passed Tuesday night ended the stalemate for now, but it leaves many questions unanswered.

The deal doesn't include any significant deficit-cutting agreement, meaning the country still doesn't have a long-term plan or even an agreement in principle on how to rein in spending. Big cuts to defense and domestic programs, which were slated to kick in with the new year, weren't worked out but instead were just delayed for two months. And the U.S. is still bumping up against its borrowing limit, or "debt ceiling."

"There's definitely another drama coming down the road," said Lehmann. "That's the March cliff."

The political bickering that's almost certain to persist could have another unwelcome effect: influencing ratings agencies to cut the U.S. government's credit score. That happened before, when Standard & Poor's cut its rating on U.S. government debt in August 2011, and the stock market plunged.

Even so, Wednesday's performance gave no hint of the dark clouds on the horizon.

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.

The yield on the 10-year Treasury note rose sharply, to 1.84 percent from 1.75 percent. Prices for oil and key metals were up. The price of copper, which can be a gauge of how investors feel about manufacturing, rose 2.3 percent.

The gains persisted despite small reminders that there are still serious problems punctuating the world economy, like middling growth in the U.S. and the still-unsolved European debt crisis. The government reported that U.S. builders spent less on construction projects in November, the first decline in eight months. And the president of debt-wracked Cyprus said he'd refuse to sell government-owned companies, a provision that the country's bailout deal says it must at least consider.

Among stocks making big moves, Zipcar (ZIP) shot up 48 percent, rising $3.94 to $12.18, after the company said it would sell itself to Avis (CAR). Avis rose 95 cents to $20.77, or 5 percent.

Marriott (MAR) rose 4 percent, up $1.52 to $38.79, after SunTrust analysts upgraded the stock to "buy." Headphone maker Skullcandy (SKUL) dropped 13 percent, losing 99 cents to $6.80, after Jefferies analysts downgraded it to "underperform."

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Sorry,...maybe I dont understand why stocks would rise,...because our crooked Politicians ONLY forced a partial deal,...with the rest " delayed " for 2 months ??
Just shows how crooked our system really is,...when investors / stocks rise on a 1/2 done deal, at the 11th hour, thats been screwed off for over a year. And the other 1/2 has been put off for a later " drama date ", because the clowns in D.C. were incompetent to get the FULL problem solved to begin with ??
So Wall St. rewards this kind of behavior , by buying / raising the Dow ??? Sorry I really dont get why stocks would RAISE, from a 1/2 done last minute deal, that D.C. has screwed off, and created so much unnecessary drama for ,..if they were competent enough to figure it out BEFORE the deadline,..and again, Wall St. commends this kind of behavior ???? Why ???
Is everyone in this Country is so stupid to cheer a 1/2 done deal, that took them over a YEAR and 3 months to figure out,..and do it past the 11th hour ??? We applaud that kind of crap ???
I say its a FAILURE !!!! Again,..the crooks of D.C., ..screwed US again,...and we are suppose to reward them for this ???
What ?? Really ?? We the People STILL lost in this fiasco of a last minute BS deal !!
Try to have a nice day.

January 03 2013 at 3:48 AM Report abuse rate up rate down Reply
Tony Pray

The Dow is nothing more than a big joke . Who really believes that just because a paper was signed that all the sudden it is going to raise over 300 points in one day ? The Dow goes up and down on rumors and half truths from the Government instead of real numbers . Soon , very soon we will be in another recession as we have hit the debt ceiling of 16.4 trillion and now Congress and the Senate have to get together with Oblama again to try and raise the debt ceiling again or face another credit downgrade because we cannot afford to pay our debts. Anyone who pays attention to the Dow deserves to lose everything they have if they are stupid enough to go along with this charade .

January 03 2013 at 1:47 AM Report abuse +1 rate up rate down Reply

what a friggin joke

January 02 2013 at 11:22 PM Report abuse +1 rate up rate down Reply

Why is this site having problems?

January 02 2013 at 11:19 PM Report abuse rate up rate down Reply

This site is having problems.

January 02 2013 at 11:16 PM Report abuse rate up rate down Reply

Where is everyone hiding?

January 02 2013 at 11:11 PM Report abuse rate up rate down Reply

Where is everyone hiding?

January 02 2013 at 11:11 PM Report abuse rate up rate down Reply


January 02 2013 at 10:22 PM Report abuse -1 rate up rate down Reply

They outsource the jobs then find America on a fiscal cliff.

January 02 2013 at 9:59 PM Report abuse +2 rate up rate down Reply

For now......

January 02 2013 at 7:33 PM Report abuse rate up rate down Reply