Investors See Silver Lining in Budget Deal

Jan. 2, 2013 — -- The three major stock indices closed up on Wedneady after Congress agreed to budget deal late Tuesday night, bringing an end for now to the frenzy over the nation's fiscal cliff.

"I think it symbolizes that the deal is better than feared," said David Bianco, U.S. equity strategist for Deutsche Bank.

The Dow Jones Industrial Average was up 308 points, or 2.4 percent, to 13,413 at the close of New York trading on Wednesday while the S&P 500 rose 36 points or 2.5 percent to 1,462.

The tech-heavy NASDAQ composite was up more than 3 percent to 3,112.

Investors appeared to respond mostly positively after the House of Representatives approved by 257-167 a bipartisan Senate deal to preserve Bush-era tax cuts for all Americans making less than $400,000 a year while increasing taxes for those wealthier.

Read more: President Obama Hails 'Cliff' Deal, Warns of Next Fiscal Fight

Taxpayers earning more than $2.7 million will pay an average of $443,910 more this year, Bloomberg News reported.

But the part of the deal that fueled investor sentiment the most today was that the dividend tax rate increased to up to 23.8 percent. Though the dividend tax rate was increased from the previous 15 percent, the rate is still lower than the 43.4 percent some had expected, Bianco said.

"We are pleasantly surprised with that outcome," he said.

In response, Bianco said Deutsche Bank raised its forecast of the S&P 500 index to 1,575 from 1,500.

Read more: What the Average American Should Know About the Capital Gains and Dividend Tax Rates

"In a low interest rate environment, the dividend yield and expectations of strong dividend growth should bring investors back to the equity market," Bianco said.

Some tax credits, such as the R&D credit, will be extended through this year.

Despite the surge in the markets, the bill does not address the country's long-term debt problems or the looming budget cuts agreed to as part of a temporary deal on the debt ceiling last year.

The "sequester" budget cuts scheduled to go into effect with the New Year -- a $1.2 trillion hit to defense and domestic programs -- were postponed for two months.

Republican leaders vowed to continue to press for additional spending cuts.

"Now the focus turns to spending," said House Speaker John Boehner, R-Ohio, in a statement after the vote. "The American people re-elected a Republican majority in the House, and we will use it in 2013 to hold the president accountable for the 'balanced' approach he promised, meaning significant spending cuts and reforms to the entitlement programs that are driving our country deeper and deeper into debt."

Bianco said the potential growth in the equities market will depend on future budget agreements.

"Obviously spending needs to be curbed to keep the deficit on a sustainable path," Bianco said.