NEW YORK -- Stocks staged a rally Monday afternoon on signs a deal inthe "fiscal cliff" was near, with the Dow Jones industrial averageclosing up 166 points, or 1.3%.
Jumping higher were the Nasdaq composite, up 60 points or 2% and the S&P 500, gaining 24 points or 1.7%.
TheDow jumped more than 130 points to about 13,068 around 3 p.m. ET afterSenate Minority Leader Mitch McConnell said a deal was near to avoidraising taxes on most Americans.
U.S. stocks had struggled formost of the last day of the year, with the "fiscal cliff" just hoursaway and Republicans and Democrats yet to hammer out a budget deal.
TheDow opened lower, with investors disappointed that politicians hadn'treached an agreement over a weekend of terse, stop-and-go negotiating.With no clarity on whether a deal would get done, and what it would looklike if it did, the Dow spent the morning flitting between small gainsand losses.
TheDow and the other major stock indexes turned higher at midday after afew signs that a deal was emerging. The Associated Press and other mediaoutlets reported that both sides had agreed on a few key points ontaxes and unemployment benefits.
If politicians can't agree on adeal by midnight, then higher taxes and lower government spending willautomatically kick in Tuesday - the so-called fiscal cliff. That wouldhurt the economy, many investors believe. But what might hurt more, theyadd, is the psychological impact of knowing that the government thatcan't agree on a budget.
"We're having a fragile recovery, withthe pain of 2008 still fresh on everybody's mind," said Joe Heider,principal at Rehmann Group outside Cleveland. "It's fear of the unknown.And fear is one of the greatest drivers of the financial markets."
It'sdifficult to discern how a deal, or lack of a deal, might affect thestock market. From mid-November through roughly mid-December, the stockmarket rose more or less steadily, despite the "fiscal cliff" looming onthe horizon. It wasn't until shortly before Christmas that the "cliff"finally scared investors enough to send the market down.
Someinvestors are unruffled by the approaching "cliff." Even if Republicansand Democrats can't reach a deal, some investors think the effect of thehigher taxes and lower government spending would be more like theanti-climactic Y2K scare than a true Armageddon. The impact would befelt only gradually - for example, workers might get more taxes withheldfrom their first couple of paychecks in the new year - but thenCongress could always retroactively repeal those higher taxes, theseinvestors reason.
Others are more concerned. The higher taxes andlower government spending could take more than $600 billion out of theU.S. economy and send it back into recession. Politically, the U.S.would send a message that its lawmakers can't cooperate. And without adeal, investors would have no good read on the country's long-termpolicy for taxes and spending, or how the government plans to eventuallytrim its deficit.
Tim Speiss, partner in charge of the personalwealth advisers practice at EisnerAmper in New York, followed the"cliff" negotiations on Monday and wondered if the U.S. would get itsdebt rating cut again. The Standard & Poor's ratings agency cut itsrating of the U.S. amid similar negotiations, when lawmakers werearguing over the government's borrowing limit in August 2011. S&Psaid at the time that "America's governance and policymaking (is)becoming less stable, less effective, and less predictable." Its ratingcut sent the stock market into a tailspin.
The other major ratingsagencies, Moody's and Fitch, have suggested that they might lower theirratings of the U.S. if the country goes over the "fiscal cliff."
"That is, unfortunately, the big story," Speiss said.
It'salso one of the only stories. There's been little other news to tradeon during the holiday season, giving the "fiscal cliff" drama outsizedinfluence. No major companies are scheduled to report earnings thisweek, and the major economic indicator this week, the government'smonthly jobs report, won't be released until Friday.
Tradingvolume has also been light, with many investors still on vacation. Thatalso makes the market more susceptible to getting yanked around: Withfewer shares trading hands, the market can be moved by relatively smalltrades.
Last week, about 2.2 billion shares traded hands each dayon average. Throughout the year, the average has been closer to 3.6billion.
The yield on the benchmark 10-year Treasury note rose to 1.76% from 1.70% late Friday.
Someof the best-performing stocks for the year were those that had beenhammered in 2011. Homebuilder PulteGroup, appliance maker Whirlpool andBank of America all more than doubled over the year, after falling bydouble-digit percentages in 2011.
Some of the worst performers ofthe year were Best Buy, Hewlett-Packard and J.C. Penney. All arestruggling to keep up with competitors who have adapted more quickly tochanging technologies and changing customer tastes. They were all upMonday, but were each down at least 45% for the year.