Stocks Swell on Deal to Avert 'Fiscal Cliff'; Dow Surges 308 Points

David Bianco and Priya Hariani, market strategists at Deutsche Bank, said that although the "fiscal cliff" deal only covers taxes and pushes the spending issues off for a couple of months, they're "pleased" that it keeps the top dividend and capital-gains tax rates low and equal at 23.8%, and are raising their 12-month S&P 500 target to 1,575 from 1,500.

Tax hikes are still set to take place but to a more diluted degree and unemployment benefits will be extended until the end of the year. Planned spending cuts scheduled to kick in this month are to be postponed for two months.

"It sets up another showdown within weeks, which has the potential to be even more disruptive given the U.S. debt ceiling must be raised at the same time if technical default is to be avoided," said Gareth Berry, a currency strategist at UBS. "But, for now, the conditions seem right for a moderate celebratory rally in risk assets, however brief, and we would be reluctant to fight this just yet."

"Wall Street will likely savor the resolution for the time being, but experience renewed investment agita before the quarter is out, offering better entry levels as the year progresses," said Sam Stovall, chief equity strategist at S&P Capital IQ.

Analysts at Cantor Fitzgerald noted that the markets seemed to be shrugging off the fact that the U.S. did in fact hit its debt ceiling late on Dec. 31, with no rating agencies having spoken out on U.S. debt following the event.

Markets were closed Tuesday for the New Year's Day holiday.

The Institute for Supply Management said Wednesday that the ISM Manufacturing Index rose to 50.7 in December from contraction territory at 49.5 in November. Economists expected an increase to 50.3 in December.

Paul Ashworth, U.S. economist at Capital Economics, said that the deal reached to avert most of the scheduled tax increases could provide a small boost to manufacturers in January, but "it is far from a certainty, particularly when the spending cuts that will hit government contractors hard have only been delayed for a couple of months."

The Census Bureau reported that construction spending fell 0.3% in November after rising by a downwardly revised 0.7% in October. Economists had predicted an increase of 0.6% for November.

Capital Economics economists noted that while the construction spending data points were disappointing, they shouldn't be cause for too much worry as construction spending numbers are generally a volatile series month to month.