S&P 500 Rallies Most in One Year as Lawmakers Pass Budget

U.S. stocks rallied, giving the Standard & Poor’s 500 Index its biggest gain in more than a year, as lawmakers passed a bill averting spending cuts and tax increases threatening a recovery in the world’s biggest economy.

All 10 groups in the S&P 500 rose at least 1.8 percent and the 30 stocks in the Dow Jones Industrial Average rallied. Apple Inc. and Facebook Inc. jumped more than 3.2 percent, pacing gains with technology companies. U.S. Steel Corp. climbed 8.6 percent after the shares were upgraded at Credit Suisse Group AG. Zipcar Inc. soared 48 percent after Avis Budget Group Inc. agreed to buy the company.

The S&P 500 jumped 2.5 percent to 1,462.42 at 4 p.m. in New York. The benchmark index is up 4.3 percent over two days, the most since November 2011. The Dow climbed 308.41 points, or 2.4 percent, to 13,412.55 today. The Nasdaq Composite Index soared 3.1 percent to 3,112.26. About 7.9 billion shares traded hands today, or 29 percent above the three-month average. U.S. exchanges were closed yesterday for the New Year’s holiday.

“We sold off on the uncertainty of what it means to go over the fiscal cliff and that’s been removed,” James Paulsen, the chief investment strategist at Minneapolis-based Wells Capital Management, which oversees about $325 billion, said in a telephone interview. “We’re re-valuing the market based on what’s closer to the underlying economy and most of the economic reports have been pretty good.”

The House of Representatives passed a bill just after 11 p.m. in Washington yesterday by a vote of 257-167, undoing income tax increases for more than 99 percent of households. The S&P 500 surged 1.7 percent on Dec. 31, the biggest rally on the final day of a year since 1974, as Republican and Democratic lawmakers made last-minute concessions to finalize the deal.

Yearlong Impasse

The bipartisan vote broke a yearlong impasse over how to prevent more than $600 billion in tax increases and spending cuts that could lead the economy back into recession. President Barack Obama said he will sign the bill into law.

The measure isn’t the grand bargain on deficit reduction lawmakers wanted when they created the tax-and-spending deadlines over the past three years. While avoiding most of the immediate pain, it is only one step toward curbing the federal deficit -- an issue that will return with a February fight over raising the $16.4 trillion debt limit.

“It’s a relief rally that we didn’t stay over the cliff,” Peter Tuz, who helps manage about $600 million as president of Chase Investment Counsel Corp. in Charlottesville, Virginia, said by phone. “There’s some clarity regarding tax rates going forward, which is a good thing,” he said. “We had a strong year in 2012 and people might have taken some money off the table and here it comes back to the market today.”

Tax Rates

Households making less than $450,000 per year would be spared an income tax rate increase under the agreement. The wealthy would see a rise in their top rate, to 39.6 percent from 35 percent.

The top tax rates on capital gains and dividends would go up to 23.8 percent, from 15 percent last year. For an individual with $10,000 invested in the S&P 500, payouts would fall to $167.64 a year from $187. An investor who sells the stock at a $5,000 profit would face capital gains obligations of about $1,190 compared with $750.

The Chicago Board Options Exchange Volatility Index, known as the VIX, fell 19 percent to 14.68 in New York today. It slumped 35 percent in two days, the most ever. VIX futures trading rose to a record 221,323 contracts today, surpassing the previous high reached Dec. 31, according to the CBOE Futures Exchange.

Bull Market

The S&P 500 advanced 13 percent in 2012, extending the bull market rally to 111 percent since March 9, 2009. Stocks of financial institutions and consumer discretionary companies advanced more than 21 percent last year. The S&P 500 is 0.2 percent below an almost five-year high set in September and needs to rise 7 percent to surpass the all-time record of 1,565.15 reached in October 2007.

Manufacturing in the U.S. expanded in December. The Institute for Supply Management’s U.S. factory index rose to 50.7 in December from 49.5 a month earlier, the Tempe, Arizona-based group said today. Economists in a Bloomberg survey projected a reading of 50.5 for December, according to the median of 71 forecasts. The dividing line between expansion and contraction is 50.

Spending on U.S. construction projects unexpectedly dropped in November, restrained by declines in non-residential building and public works, a separate report showed.

Cyclical Shares

Investors bought shares of companies most tied to economic growth, sending the Morgan Stanley Cyclical Index and Dow Jones Transportation Average to their highest levels since July 2011. The Morgan Stanley gauge, which tracks 30 U.S. companies, added 2.9 percent, while the Transportation Average, which includes companies like FedEx Corp. and Union Pacific Corp., jumped 2.4 percent.

Financial companies rallied 2.9 percent. Bank of America Corp., the second-biggest U.S. bank by assets, rose 3.6 percent to $12.03. Citigroup Inc. added 4.3 percent to $41.25.

Technology companies climbed 3.2 percent. Apple, the world’s most valuable company, jumped 3.2 percent to $549.03. Facebook, the company that runs the largest social-networking website, advanced 5.2 percent to $28.

All 11 companies in the S&P Supercomposite Homebuilding Index rose as the gauge added 2.7 percent to the highest level since 2007. M/I Homes Inc. surged 3.8 percent, the most in the measure, to $27.50.

Macau Casinos

Wynn Resorts Ltd. jumped 5 percent to $118.07, and Las Vegas Sands Corp. increased 5.6 percent to $48.75. Macau casino revenue rose 20 percent to a record last month, beating analyst estimates, as Christmas promotions drew more holiday-makers to the world’s biggest gambling hub.

Casino revenue in the Chinese city jumped to 28.2 billion patacas ($3.5 billion) in December, trumping the previous record of 27.7 billion patacas in October, according to data from Macau’s Gaming Inspection and Coordination Bureau today.

U.S. Steel, the largest U.S. producer of metal by volume, gained 8.6 percent to $25.89. The stock was upgraded to outperform from neutral at Credit Suisse, which said the U.S. steel sector may be poised for a bounce.

Zipcar surged 48 percent to $12.18. Avis Budget, an automobile rental company, agreed to buy the car-sharing firm for $491 million, or $12.25 a share, targeting consumers looking for an alternative to owning their own auto. The offer is 49 percent higher than the Cambridge, Massachusetts-based company’s Dec. 31 closing price.

Wien’s Predictions

Blackstone Group LP’s Byron Wien, whose prediction for the U.S. stock market in 2012 proved accurate, said the S&P 500 will fall below 1,300 this year and European stocks will decline 10 percent.

Gold will climb to $1,900 an ounce and financial stocks will reverse their gains from last year, Wien, chairman of Blackstone’s advisory services unit, said in his annual “10 Surprises” list published since 1986. The Shanghai Composite Index will rally 20 percent in 2013, he said. His current forecast for the S&P 500 implies an 8.9 percent drop from last year’s closing level.

“A profit margin squeeze and limited revenue growth cause 2013 earnings for the S&P 500 to decline below $100, disappointing investors,” Wien wrote in an e-mailed statement today. “The structural problems of Europe remain largely unresolved and the mild recession that began there in 2012 continues.”

The 79-year-old former Morgan Stanley senior strategist correctly forecast the U.S. stock market a year ago when he said the S&P 500 would exceed 1,400. It closed 2012 at 1,426, rallying 13 percent. Wien also predicted rallies of 15 percent or more in equities in China, India and Brazil in 2012. While India’s Sensex Index gained 26 percent, Brazil’s Bovespa climbed 7.4 percent and the Shanghai Composite advanced 3.2 percent.

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