Dow closes up 300 on ‘fiscal cliff’ deal

Financial markets rode a wave of relief over the “fiscal cliff” Wednesday, as stocks surged on news that Washington had avoided policies that could have caused a recession.

The Dow Jones Industrial Average closed up 308 points, or 2.4 percent, in the first day of trading after Congress approved the contentious tax and spending package. The S&P 500 and Nasdaq both experienced similar jumps, with the latter climbing over 3 percent in the first day of trading in 2013.

{mosads}The stock spike comes after policymakers managed to reach an agreement that averts, at least temporarily, many of the tax increases and spending cuts that could have thrust the U.S. into a recession. The last-minute agreement was passed by both the House and the Senate in late-night hours after intense negotiations.

The bill indefinitely extends marginal tax rates on annual family incomes up to $450,000, lifts the top capital gains and dividends rates to 20 percent, extends unemployment insurance benefits and includes a host of other tax provisions.

The compromise also delays automatic spending cuts for just two months, buying Washington a brief stretch of time before the battle over those cuts begins anew.

But while the markets enjoyed a big rally on news of a deal, there are future conflicts over the nation’s fiscal course that could rattle markets in the coming months.

The fiscal-cliff deal does not increase the debt limit, meaning lawmakers will be sparring on that issue in a matter of weeks. The government officially reached its $16.4 trillion borrowing limit Monday, and Congress will likely have about two months to haggle over legislation to raise the debt ceiling before the government defaults.

And earlier Wednesday, Moody’s Investors Service warned that Washington will need to take further measures to rein in the deficit if it wants to avoid a second downgrade. The credit rating agency called the latest deal a positive step, but insufficient. It added that it would be watching the outcome over the fight to raise the debt limit, as well as replace the sequester, closely to determine what action it should take.

“The debt trajectory resulting from this process is likely to determine whether the Aaa rating is returned to a stable outlook or downgraded to Aa1,” the agency said.