MarketView for January 2

Summary

The stock market began its first trading day of the New Year by chalking up its best day in over a year on Wednesday, 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 December 20, 2011, pushing the benchmark index to its highest close since September 14.

Stocks ended 2012 with the S&P 500 up 13.4 percent for the year, as investors largely shrugged off worries about the fiscal cliff. For the year, the Dow gained 7.3 percent and the Nasdaq rose 15.9 percent.

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, the Street's favorite gauge of investor anxiety, closed down 18.5 percent to 14.68. The VIX is now down 35.4 percent over the past two sessions, the largest 2-day percentage drop in the history of the index.

The financial markets were closed on Tuesday for New Year's Day.

The S&P Information Technology index gained 3.2 percent, including Hewlett-Packard, which climbed 5.4 percent to $15.02. HP's gain followed a miserable 2012 when the stock fell nearly 45 percent as one of the S&P 500's worst performers 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 $109 billion in military and domestic programs were temporarily delayed, and another fight over raising the U.S. debt limit also looms.

Bank shares rose following news that U.S. regulators are close to securing another multibillion-dollar settlement with the largest banks to resolve allegations that they unlawfully cut corners when foreclosing on delinquent borrowers.

Bank of America rose 3.7 percent to $12.03 and Citigroup gained 4.3 percent to $41.25. Shares of Zipcar were up 47.8 percent to $12.18 after Avis said it would buy Zipcar for about $500 million in cash to compete with larger rivals Hertz and Enterprise Holdings Inc. Avis advanced 4.8 percent to $20.77.

Shares of Apple ended the day up 3.2 percent to $549.03, helping to lift the S&P information technology index 3.2 percent following a report that the most valuable tech company has started testing a new iPhone and a new version of its iOS software.

Economic data from the Institute for Supply Management indicated that manufacturing ended 2012 on an upswing despite fears about the fiscal cliff, but the Commerce Department reported that construction spending fell in November for the first time in eight months.

Volume was heavy, with about 7.8 billion shares changing hands on the three major equity indexes, well above the 2012 daily average of 6.42 billion shares.

Manufacturing Ends 2012 on Positive Note

Manufacturing ended 2012 on an upswing despite fears about the "fiscal cliff," data showed on Wednesday. Factories returned to growth in December after contracting the previous month, the Institute for Supply Management said. Its index of national factory activity rose to 50.7 up from 49.5 in November. The ISM index had fallen to a 40-month low in November.

ISM's employment index rose to 52.7 from 48.4 in November, while its forward-looking new orders component kept at 50.3. A separate measure of manufacturing also showed growth.

Financial data firm Markit's Manufacturing Purchasing Managers Index picked up to 54.0 from 52.8 in November. This was its highest point since May on a final basis despite just missing its preliminary estimate of 54.2.

A rise in new orders fueled the faster growth, as one in five companies reported an increase. The Markit index's new orders component rose to 54.7 from 53.6 in November, its quickest increase since April.

The growth in manufacturing came in the face of fears late last year over the "fiscal cliff" of tax hikes and spending cuts, which would have kicked in at the start of 2013, risking a new U.S. recession.

Despite Tuesday's deal, Congress still must debate how to handle the automatic spending cuts and resolve differences over the federal debt ceiling which could result in a new round of political wrangling.

The deal is in line with what many financial firms on Wall Street and around the world have been expecting, suggesting forecasts for economic growth of around 1.9 percent for 2013 would likely hold.