Dow up 308 as tax deal cheers investors

Updated: 4:53 p.m. ET

Don't look now, but the stock market set a record on Wednesday. In the process of generating its biggest rally in more than a year, the major averages opened higher on the first day of the year for a record fifth year in a row.

The Dow Jones industrials ($INDU) closed up more than 300 points, and the major averages had their largest gains on an opening day of trading this century. The Standard & Poor's 500 Index ($INX) and the Nasdaq Composite Index ($COMPX) also enjoyed record-setting days.

The catalyst is obvious: Markets around the world heaved a big sigh of relief that Congress agreed to a deal that would keep Bush-era tax cuts in place for all but the most affluent. The bill raises the top tax rate for the most affluent Americans.

The Dow soared 308 points to 13,413. The S&P 500 added 36 points to 1,462. And the Nasdaq climbed 93 points to 3,112. The Nasdaq-100 Index ($NDX), which tracks the largest Nasdaq stocks, gained 86 points to 2,746. The point gains for the Dow, S&P 500 and Nasdaq were their biggest since Nov. 30, 2011, when they rose 490, 52 and 105 points, respectively. The percentage gains -- 2.35%, 2.54% and 3.07%, respectively -- were the best since 2009.
There is a risk, however, that the rally may be short-lived. A more contentious fight between Democrats and Republicans in Congress is ahead over raising the nation's debt ceiling and over spending cuts required under the 2011 budget deal.

"House Republicans can be humiliated for only so long," Greg Valliere of the Potomac Research Group wrote clients on Wednesday morning. "They're itching for fights where they have leverage." And they potentially have lots of leverage over the debt ceiling and spending.

• Paychecks shrinking despite deal

The stock market's gains come after it ended higher on the first session of the year for the fifth straight time and after Monday's big rally as the outlines of the deal, forged by Vice President Joe Biden and Senate Minority Leader Mitch McConnell, began to take form.

One big reason for the rally was that tax rates on dividends were largely left alone.

If you're single earning $400,000 a year or more or married earning $450,000, you'll pay 20% on your dividend income. For everyone else, it's 15%. Stocks paying big dividends like AT&T (T), Verizon Communications (VZ) and Consolidated Edison (ED) jumped 2% or more as a result.

Still, the Dow, S&P 500 and Nasdaq still remain below their 2012 highs, set in September and early October. The S&P 500 is within 3 points of its post-crash high of 1,465.77, set Sept. 14.

The market had closed higher on four straight up opening days only twice: between 1973 and 1976 and between 2009 and 2012, according to Standard & Poor's Howard Silverblatt.

It is not uncommon, however, for the market to rise on the first trading day of the year. In fact, the market has moved higher on the first day of trading 10 times this century. Three of the four declines -- in 2000, 2001 and 2008 -- suggested difficult times were ahead.

All 30 Dow stocks were higher, led by Hewlett-Packard (HPQ), Caterpillar (CAT) and AT&T.

Energy stocks were the strongest sector of the S&P 500, where about 450 of its component stocks were higher. Also showing strength: semiconductors, steel, housing and airline stocks.

The S&P 500 leaders were U.S. Steel (X), Lam Research (LRCX) and LSI Logic (LSI). Also showing strength: MetLife (MET) and Viacom's Class B shares (VIAB).

Alexion Pharmaceuticals (ALXN) was the Nasdaq-100 leader, followed by Viacom, Regeneron Pharmaceuticals (REGN) and Wynn Resorts (WYNN). Facebook (FB), up $1.38  to $28, was higher on speculation its mobile advertising efforts will pay off.

Apple (AAPL), which represents more than 17% of the market capitalization of the stocks in the index, was up $16.86 to $549.03. The shares are up 9.5% since hitting a near-term bottom of $501.23 on Dec. 17.

In addition, shares of Zipcar (ZIP), the car-sharing company, were up $3.94 to $12.18 after agreeing to sell out to Avis Budget Group (CAR) for $12.25 in cash per share, or about $500 million, a 49% increase from Monday's close. The downside of the deal: Zipcar went public in 2011 at $18 and jumped to as high as $31.25 on the first day of trading and never came close to hitting that price again. It bottomed at $5.90 on Nov. 7. 

European and Asian stocks also surged Wednesday, with stocks in Germany, the United Kingdom and France rising more than 2%. Hong Kong's Hang Seng Index jumped 655 points, or 2.9%, to 23,312.

The market rally pushed interest rates higher; the 10-year Treasury yield moved up to 1.832% from Monday's 1.756%.

Gold (-GC) settled up to $13 to $1,688.80 an ounce in New York. Crude oil (-CL) in New York settled at $93.12 a barrel, up $1.30. Brent crude in London was up $1.19 to $112.30.

There was OK news on manufacturing from the Institute for Supply Management. Residential construction spending also moved higher in November, the Commerce Department said, but construction spending overall fell for the first time since March because of a 5.5% decline in spending on federal construction projects.

But Chinese manufacturers enjoyed a strong end to the year with operating conditions improving at the fastest rate in 19 months, according to HSBC's latest Purchasing Managers' Index.

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