Stocks rally after fiscal cliff compromise

NEW YORK -- The "fiscal cliff" compromise, despite lingering problems, sent the stock market shooting higher Wednesday, first trading day of the new year.

The major U.S. stock indexes swelled at least 2% before trimming some of those gains. The Dow Jones industrial average briefly surged to its biggest gain in six months before giving up some ground.

Stocks around the world also leapt higher. Major indexes in Britain, France and Germany rose more than 2%. Markets in Greece and Spain were up more than 3%. Stocks in Asia also zoomed higher.

In the U.S., the rally was extraordinarily broad. For every stock that fell on the New York Stock Exchange, roughly 10 rose.

Some investors cautioned that the euphoria can't last long.

The market's big escalation, they said, was driven not so much because investors love the budget deal that Republicans and Democrats hammered out, but because they're grateful there was any deal at all.

"Most people think that no deal would have been worse than a bad deal," said Mark Lehmann, president of JMP Securities in San Francisco. He called the current package "not too Draconian."

The bill passed Tuesday night will prevent the "cliff" from taking hold. Still, it only postpones rather than solves many of the budget issues haunting the U.S.

The deal doesn't include any significant deficit-cutting agreement, meaning the country still doesn't have a long-term game plan for how to rein in spending. Big cuts to defense and domestic programs, which were slated to kick in with the new year, are still overhanging the market but just delayed for two months. And the U.S. is still set to bump up against its borrowing limit, or "debt ceiling," in about two months.

"There's definitely another drama coming down the road," said Lehmann. "That's the March cliff."

Others worry that more political bickering could cause the U.S. to get its debt rating downgraded by the ratings agencies. The stock market plunged in August 2011 after Standard & Poor's cut the U.S. government's credit rating.

Wednesday's performance gave no hint of the dark clouds on the horizon.

The Dow briefly surged as much as 273 points.

The yield on the 10-year Treasury note rose sharply, to 1.84% from 1.75%, as investors dumped safe harbor investments like U.S. government bonds and plowed money into stocks. Prices for oil and key metals, including gold, copper and platinum, were up.

Among stocks making big moves, Zipcar shot up 48%, or $4, to $12.24 after the company said it had agreed to sell itself to Avis. Avis rose $1.02 to $20.84, about 5%.

Zipcar has a business model that's popular with drivers, allowing them to rent cars for just a few hours at a time. The company has struggled to win over investors, however, and its stock plunged nearly 39% in 2012. Avis rose 84% in the same period.

Associated Press