Budget deal sends markets surging

Photo: The Canadian Press. All rights reserved.

Traders work on the floor at the New York Stock Exchange in New York, Wednesday, Jan. 2, 2013. The fiscal cliff compromise, for all its chaos and controversy, was enough to send the stock market shooting higher Wednesday, the first trading day of the new year. (AP Photo/Seth Wenig)

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 per cent 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-harbour investments. And the VIX, an index that measures investors' expectations of future market volatility, plunged more than 18 per cent to 14.68, the lowest close since October.

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 per cent to 13,412.55.

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

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.