Stocks soar on hopes of a deal

NEW YORK — The stock market shot higher Monday to end what turned out to be a strong year for stocks.

The surge on the last day of the year came as Congress appeared to be nearing a deal to avert more than $600 billion in tax increases and spending cuts.

At the close of trading, the Dow Jones industrial average was up 166.03 points, finishing the year at 13,104.14. That’s a gain of 7.3 percent for the year, the Dow’s fourth straight year of gains.

The Standard & Poor’s 500 index rose 23.76 to 1,426.19. The Nasdaq composite climbed 59.20 to 3,019.51. For the year the Nasdaq rose 15.9 percent.

Rising stocks outnumbered falling ones by a ratio of 6-to-1 on the New York Stock Exchange on Monday. Consolidated volume was higher than in recent days, 3 billion shares.

The S&P index rose 13.4 percent for the year, after finishing flat in 2011. It was the index’s best year since 2009, and it came despite overhanging problems like Europe’s debt crisis and anemic U.S. growth, bringing U.S. indexes close to their highs reached before the 2008 financial crisis.

Including dividends, the gain for the S&P 500 was even higher - 16 percent.

For the market, the close Monday was a high note in what had been a choppy day. It also marked a turnaround after five-straight days of losses attributed to federal budget negotiations.

“It’s still impossible to know what the specific details are [of a potential budge deal], but this all makes me hopeful that Congress can at least defuse the ticking time bomb,” said Jack Ablin, chief investment officer of BMO Private Bank in Chicago. “Just the fact that Congress can agree on something is worth celebration.”

Stocks fell at the opening of trading Monday and struggled for direction throughout the morning. The indecisiveness overlaid a day of budget negotiations in Washington, where lawmakers were trying to hammer out a budget deal to avert a “fiscal cliff” of automatic tax increases and government spending cuts.

Stocks jumped at midday after reports that the bare outline of a deal had been reached. The gains faded after President Barack Obama said in the early afternoon that a compromise was “within sight” but was not finalized.Then, in the late afternoon, the indexes shot higher again. Congressional Republicans and the Democratic White House said they had agreed on some measures but still had no final deal in hand.

Some investors were unruffled. They said they thought that even if the U.S. went over the fiscal cliff, it would be more akin to the anti-climactic Y2K scare, when some had expected widespread computer failures as systems supposedly couldn’t handle the change to the digits “00” used to represent the year when 1999 passed into 2000.

The fiscal cliff impact would be felt only gradually, those investors said. For example, workers might get more taxes withheld from their paychecks in the new year, but it’s not as if they’d have to pay all their higher taxes upfront. And Congress could always retroactively repeal those higher taxes.

“Despite Washington, D.C.’s best effort to derail the economy, at this point it looks like the economy will continue in this subpar-growth trajectory that we’re in,” said Ron Florance, managing director of investment strategy at Wells Fargo Private Bank.

“A deal stopping the tax increase does reduce meaningfully the prospect of recession in the beginning of 2013,” he added.

Others were more concerned. If a deal wasn’t reached, the higher taxes and lower government spending could take more than $600 billion out of the U.S. economy and send it back into recession. Investors would have no good read on the country’s long-term policy for taxes and spending.

The psychological impact - the U.S. would essentially be broadcasting that its lawmakers can’t compromise - would also hurt, some said.

“We’re having a fragile recovery, with the 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.”

Tim Speiss, a partner in charge of the personal-wealth advice at EisnerAmper in New York, followed the budget negotiations Monday and wondered whether the U.S. would get its debt rating cut again. The Standard & Poor’s ratings agency cut its rating of the U.S. government amid similar negotiations in August 2011, when lawmakers were arguing over the government’s borrowing limit.

S&P said at the time that the “political brinksmanship” highlighted how “America’s governance and policy making [are] becoming less stable, less effective and less predictable.” Its rating cut sent the stock market into a tailspin.

The other major ratings agencies, Moody’s and Fitch, suggested that they might also lower their ratings of the U.S.

“That is, unfortunately, the big story,” Speiss said.

There’s been little other news to trade on during the holiday season, which gave the budget negotiations outsize influence. No major companies are scheduled to report earnings this week. The most significant economic indicator scheduled for this week, the government’s monthly jobs report for December, won’t be released until Friday.

The yield on the benchmark 10-year Treasury note rose to 1.76 percent from 1.70 percent late Friday, a sign that investors were moving money into stocks.

Some of the best-performing stocks for the year were those that were making up for deep losses in 2011. Homebuilder Pulte Group nearly tripled after falling for five of the previous six years. Appliance-maker Whirlpool and Bank of America more than doubled over the year, after falling by double-digit percentages in 2011.

Some of the worst performers of 2012 were Best Buy, Hewlett-Packard and J.C. Penney. All are struggling to keep up with competitors that have adapted more quickly to changing technologies and customer tastes. They were all up for the day but were all down at least 44 percent for the year.

Information for this article was contributed by Christina Rexrode of The Associated Press; by Whitney Kisling of Bloomberg News; and by Kate Gibson of Market-Watch.