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The close: S&P 500 sees biggest jump in a year Add to ...

A late afternoon jump on Wednesday gave U.S. indexes their biggest one-day gains in more than a year, as investors reacted to a budget agreement in Washington that averted the so-called “fiscal cliff.”

The S&P 500 closed at 1462.42, up 36.23 points or 2.5 per cent – marking its biggest gain since December 2011. The blue-chip Dow Jones industrial average closed at 13,412.55, up 308.41 points or 2.4 per cent.

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In Canada, the S&P/TSX composite index closed at 12,540.77, up 107.24 points or 0.9 per cent.

The rally follows the New Year’s Day compromise in Washington over the U.S. budget – an agreement that headed off a near-term economic crisis but did little to solve longer-term issues.

The agreement removed the concern that political gridlock would raise taxes across the board and impose spending cuts so severe that they would have taken a 3.5 per cent bite out of the U.S. economy, pushing it into recession.

It raises taxes on the wealthiest 2 per cent of Americans but prevents tax increases on the middle class. However, it was not the so-called “grand bargain” that some had hoped for and did not end some of the bitter divides in Washington. For example, it merely deferred spending issues for the coming months, ensuring more uncertainty ahead.

But investors on Wednesday seemed more focused on the catastrophe that had been averted, driving up stocks in a broad rally.

Within the S&P 500, nearly 94 per cent of stocks ended the day higher.

Beyond the budget agreement, markets also received some upbeat economic news. The ISM manufacturing index rose to 50.7 in December, up from 49.5 in November and slightly ahead of economists’ expectations – though economists pointed out that November’s weak reading had been due to the effects of Hurricane Sandy.

The gains in the U.S. market have put the S&P 500 close to its five-year high of 1465, touched in mid-September.

Meanwhile, the yield on the U.S. 10-year Treasury bond rose to 1.834 per cent, up 7.6 basis points, as bond prices fell. That marks the highest yield on the 10-year bond since mid-September.

Commodity prices rose. Gold hit $1,688.80 (U.S.) an ounce, up $13. Crude oil to rose $93.12 a barrel, up $1.30.

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