Why the Dow Surged, Even Though the Fiscal Cliff Deal Solves Only Half the Problem


When the House of Representatives met yesterday and voted to pass a bill that would keep taxes the same for most Americans and postpone massive federal spending cuts, they essentially kicked the can further down the road. But investors rallied behind the deal and drove the Dow Jones Industrial Average higher. The index closed the first trading day of 2013 up 308 points, or 2.35%, and now sits at 13,412. The other major indexes also climbed today, as the S&P 500 ended the session up 36 points, or 2.54, while the Nasdaq led the three indexes with its 92 points, or a 3.07% increase.

The most potentially devastating part of the fiscal cliff was the scheduled end of the Bush tax cuts, which would have essentially raised the marginal income tax rate on all Americans, no matter their income level. That could have crushed the economy. With many lower- and middle-class families still struggling to get by after the most recent recession took a devastating toll on these important income groups, hitting them with another punch may well have knocked them out. Many economists believed that with higher income taxes across the board, spending would decrease and the U.S. would fall back into another recession. But on New Year's Day, Congress passed a bill that kept the marginal income tax rate the same on Americans making less than $400,000 individually or $450,000 filing jointly.

While every single Dow component ended the day in the green, some of the best performers were the consumer-oriented companies. Shares of Coca-Cola rose by 3.72%, while AT&T saw its shares increase by 3.83%. The Dow's top performer today was Hewlett-Packard , which saw shares rise by 5.4%, and following on the coattails of the PC manufacturer was Microsoft , which rose by 3.41%.

More foolish insight
While Hewlett-Packard was the top Dow performer today, it is also the one Dow component that hurt investors the most in 2012, after losing nearly 50% of its value. Many analysts believe that the massive wave of mobile computing was the driving force behind HP's horrible year. However, HP's rapidly shifting its strategy under the new leadership of CEO Meg Whitman. But does this make HP one of the least-appreciated turnaround stories on the market, or is this a minor blip on its road to irrelevance? The Motley Fool's technology analyst details exactly what investors need to know about HP in our new premium research report. Just click here now to get your copy today.

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