Stocks rally on U.S. budget deal

Obama re-election
President Barack Obama

U.S. stocks rose on Wednesday, sending the S&P 500 to its biggest two-day rally since July, a day after U.S. lawmakers passed a bill averting spending cuts and tax increases that had threatened a recovery in the world’s biggest economy.

Also helping stocks was an industry report Wednesday that showed American manufacturing expanded in December at a pace that shows the industry is stabilizing after reaching a three-year low a month earlier.

The Dow Jones industrial average closed up 308.41, or 2.35%, at 13,412.55; the S&P 500 rose 36.23, or 2.54%, closing at 1,462.42; and the Nasdaq composite was up 92.75, or 3.07%, to close at 3,112.26. All numbers are preliminary.

All 10 groups in the S&P 500 rose at least 1.1% and 29 out of 30 stocks in the DJIA rallied.

President Barack Obama said he will sign into law the bill undoing tax increases for more than 99% of households as Republicans vowed to fight him for spending cuts in exchange for raising the debt ceiling.

“We sold off on the uncertainty of what it means to go over the fiscal cliff and that’s been removed,” James Paulsen, chief investment strategist at Wells Capital Management, which oversees about $325 billion, said in a telephone interview. “We’re revaluing the market based on what’s closer to the underlying economy and most of the economic reports have been pretty good.”

The S&P 500 jumped 1.7% on Dec. 31, the biggest end-of-year gain since 1974, in anticipation of a budget deal. The benchmark index climbed 13% in 2012, its best year since 2009 when markets began recovering from the bear market that followed the U.S. financial crisis.

“It’s a relief rally that we didn’t stay over the cliff,” Peter Tuz, who helps manage about $600 million as president of Chase Investment Counsel, said by phone. “There’s some clarity regarding tax rates going forward, which is a good thing. We had a strong year in 2012 and people might have taken some money off the table and here it comes back to the market today.”

The Institute for Supply Management’s manufacturing index climbed to 50.7 last month from November’s 49.5, which was the weakest since July 2009, the group’s report showed Wednesday. Fifty is the dividing line between expansion and contraction.