Fiscal cliff deal sparks a new year rally in US

US stocks kicked off the new year with their best day in over a year yesterday, sparked by relief over a last-minute deal in Washington to avert the “fiscal cliff” of tax hikes and spending cuts that threatened to derail the economy’s growth.

In 2013’s first trading session, the S&P 500 achieved its biggest one-day gain since 20 December 2011, pushing the benchmark index to its highest close since 14 September.

Concerns over Washington’s ability to sidestep the cliff had driven the S&P 500 down for five straight sessions, before signs that a resolution was near sent the benchmark index higher on the final trading session of 2012.

The CBOE Volatility Index or the VIX, a gauge of investor anxiety, dropped 18.5 per cent to 14.68 at the close. The VIX has fallen 35.4 percent over the past two sessions.

The Dow Jones industrial average jumped 308.41 points, or 2.35 per cent, to 13,412.55 at the close. The Standard & Poor’s 500 Index gained 36.23 points, or 2.54 per cent, to 1,462.42. The Nasdaq Composite Index climbed 92.75 points, or 3.07 per cent, to end at 3,112.26.

Market breadth reflected the strong rally, with 10 stocks rising for every one that fell on the New York Stock Exchange. All 10 of the S&P 500 industry sector indexes gained at least 1 per cent. The S&P financial index shot up 2.9 per cent.

The S&P Information Technology index gained 3.2 per cent, including Hewlett-Packard, which climbed 5.4 per cent to $15.02. HP’s gain followed a miserable 2012 when the stock fell nearly 45 percent as one of the worst performers on the S&P 500 for 2012.

On Tuesday, Congress passed a bill to prevent huge tax hikes and delay spending cuts that would have pushed the world’s largest economy off a “fiscal cliff” and possibly into recession.

The vote avoided steep income-tax increases for a majority of Americans, but failed to resolve a major showdown over cutting the budget deficit, leaving investors and businesses with only limited clarity about the outlook for the economy. Spending cuts of $109bn in military and domestic programs were temporarily delayed, and another fight over raising the U.S. debt limit also looms.

“We got through the fiscal cliff. The next big thing, and probably more contentious thing, is negotiating the debt ceiling and possibly entitlement reform in early 2013,” said Jim Russell, senior equity strategist for US Bank Wealth Management in Cincinnati.

Hard choices about budget cuts and the critical need to raise the debt ceiling will confront Congress about the same time in two months "so the fur will be flying,” Russell said.

US stocks ended 2012 with the S&P 500 up 13.4 per cent for the year, as investors largely shrugged off worries about the fiscal cliff. For the year, the Dow gained 7.3 per cent and the Nasdaq jumped 15.9 per cent.