Stocks surge as 'cliff' puzzle is solved

Wall Street cheered an agreement that ended the fiscal impasse in Washington, sending the Standard & Poor's 500 to its biggest gains in more than a year on Wednesday.

After being restrained for much of the last three months by the political squabbling over an array of tax increases and spending cuts known as the "fiscal cliff," investors demonstrated their new willingness to take risks in a broad array of financial markets around the world.

Shares in more speculative investments rose much faster than blue chips, sending the Russell 2000 index of smaller companies up 2.8 percent to 873.42, its highest level ever. The benchmark S&P 500 stock index rose 2.5 percent, or 36.23 points, to 1,462.42. One more day of the same magnitude will bring the index to its highest level since the 2008 financial crisis.

"You've just removed a huge worry from the market," said Jonathan Lewis, the chief investment officer at Samson Capital Advisors. "We've been in a never never land where markets have not been able to take their attention off Washington."

Congress signed off on the deal late Tuesday night, and it immediately sent stocks soaring first in Asia and then in Europe.

Leading indexes rose 2.6 percent in France, 2.2 percent in Germany and 2.9 percent in Hong Kong. Markets in Japan and China were closed for holidays.

The Dow Jones industrial average rose 2.4 percent, or 308.41 points, to 13,412.55. The Nasdaq composite index increased by 3.1 percent, or 92.75 points, to 3,112.26.

Only 31 stocks in the S&P 500 dropped on Wednesday. Technology and financial stocks did particularly well, as did stocks that offer generous dividends.

In the bond market, investors sold off the longer-dated Treasurys that have been used as safe havens in recent years. The price of the Treasury's 10-year note fell while its yield rose to 1.84 percent, from 1.76 percent late Monday.

The agreement Tuesday raised the tax rate on dividends to 20 percent from 15 percent for wealthy investors, less than President Barack Obama had proposed.

In the United States, share prices gained most in the first 30 minutes of the day and then plateaued before a brief spike just before trading closed.

Many market strategists were worried that Wednesday's rally would not last long because of the questions that were not addressed by the fiscal accord. While the deal provides a long-term settlement on tax rates, it only delayed for two months $110 billion of spending cuts that were supposed to start Jan. 1. Congress also put off a decision about limits on government borrowing, known as the debt ceiling.

The Treasury Department has said that the government hit the ceiling at the end of 2012 and it will only be able to finance the budget using extraordinary measures until March. Republican leaders in the House of Representatives have said they will raise the borrowing limit only if Democrats agree to more spending cuts. That upcoming debate may well be more fractious than what has taken place in recent weeks, analysts said.

Leon LeBrecque, the founder of the asset management firm LJPR, said that Wednesday's rally would not last long as investors turned their attention to the unanswered questions.

"We're in a three-act play, but we're only through with Act 1," said LeBrecque. "Everyone is happy about the first act. The real question is what happens next."

The last time the government reached its borrowing limit, in 2011, Congress approved an increase only at the last minute.

This led Standard & Poor's rating services to strip the U.S. of its AAA credit rating. There is widespread concern that one of the other two major credit rating agencies will lower their rating of U.S. government debt in the coming months.

On Wednesday, Moody's Investors Service said that the fiscal pact did not help the nation's debt and deficit problems and "will likely be a constraint on growth in coming quarters."

It said the looming fight over spending cuts and lifting the debt ceiling add "uncertainty to the outcome of negotiations."

But there is hope in some quarters of Wall Street that with each new crisis, and each last-minute fix, the risks to the markets grow less severe as investors become convinced that politicians eventually find solutions.

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