Stocks kicked off the first trading day of 2013 with a sharp 2-percent rally across the board, with the S&P 500 and Nasdaq logging their best gains since December 2011, as Wall Street celebrated the last-minute budget deal by lawmakers to avert the "fiscal cliff" that would have pushed the economy into recession.
The Dow Jones Industrial Average soared 308.41 points, or 2.35 percent, to close at 13,412.55, led by last year's blue-chip laggard Hewlett-Packard.
There have only been five instances when the Dow had a triple-digit move on the first day of trading. And in an optimistic sign for investors, the blue-chip index then went on to finish with a gain of greater than 7 percent in each of those years.
The S&P 500 jumped 36.23 points, or 2.54 percent, to finish at 1,462.42. Nasdaq surged 92.75 points, or 3.07 percent, to end at 3,112.26. The Russell 2000 small-cap index rallied to its best level since April 2011. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, tumbled below 15.
All key S&P sectors ended firmly in positive territory, led by techs and financials.
"We spent November and December ignoring a lot of good [fundamental] news as we waited to see how this fiscal cliff would unfold," said Art Hogan, managing director at Lazard Capital Markets. "The market's reacting in an appropriate fashion because we're halfway home and there's some middle ground…So some pent-up demand for stocks is coming back into the market.
Meanwhile, some strategists said the fiscal cliff resolution cleared the way for a rally, unleashing New Year's buying by fund managers.
"It's new money for the new year," said Art Cashin, director of floor operations at UBS. "It's going on globally. It's not just a flight from safety if you look at the percentage moves, many of them are identical so to me, it's assets coming in." (Read More: Behind Today's Rally: It Wasn't Just 'Cliff' Deal )
Cashin said in the last hour the market on close buy orders increased dramatically, with 70 to 75 percent to the buy side.
"That put a special bid under the market. What we benefited from today is the politicians haven't run to center stage," he said. "If they do that, things could change. This is a pretty hefty move. I would look for more consolidation tomorrow."
Late Tuesday, lawmakers passed legislation that prevented most impending tax increases and postponed spending cuts by two months, while raising taxes on the wealthiest 2 percent of Americans. (Read More: Rocky Path Ahead Even as Markets Cheer Fiscal Deal )
President Barack Obama praised the bi-partisan deal but said there was more work to be done, saying it was "just one step in the broader effort to strengthen the economy."
While the vote averts immediate pain like tax hikes for almost all U.S. households, it does little to resolve other political showdowns on the budget that loom in coming months. Spending cuts of $109 billion in military and domestic programs will only be delayed for two months.
"We didn't deal with the expense issue—we kicked that can down for two more months and there's still business to be done," said Steve Massocca of Wedbush Securities. "Many large dividend-paying companies got sold off as part of the fiscal cliff concern and today, they're all up dramatically and I think there's more room to run."
Meanwhile, ratings agency Moody's said the U.S. must do more than the recent deal if the country wants to save its rating from its current negative outlook.
Uncertainty over the fiscal cliff spooked equities for the last two months, sending stocks on a roller coaster ride. (Read More: Equity Markets Still Look Attractive in 2013)
Stocks closed out 2012 on a high note, with a New Year's eve rally that boosted the S&P 500 up 13.4 percent for the year, after a flat performance in 2011. Major global markets were closed Tuesday for the New Year's holiday.
The fiscal cliff deal also fueled a global rally, with European markets closing up more than 2 percent. Australia's ASX All Ordinaries index jumped 1.3 percent, South Korea's KOSPI gained 1.7 percent and the Hang Seng in Hong Kong climbed nearly 2 percent. Japan's Nikkei and the Shanghai Composite remained closed for an extended New Year's holiday.
Zipcar surged nearly 50 percent after news that Avis Budget Group will acquire the rental car company in a deal worth nearly $500 million.
Bank of America also gained following a Wall Street Journal report that the company could be in position to repurchase the $5 billion stake that Warren Buffett took in 2011. In addition, Evercore added the bank to its "conviction list."
Apple jumped more than 3 percent amid reports the tech giant has started testing a new iPhone and the next version of its iOS software. Meanwhile, Raymond James lowered its price target on the company to $690 from $700.
Facebook rallied more than 5 percent after JPMorgan lifted its price target on the social-networking company to $35 from $29 and Cowen & Co. initiated coverage of the firm with a "neutral" rating.
U.S. Steel climbed to lead the S&P 500 gainers after Credit Suisse boosted its rating on the company to "outperform" from "neutral."
While no major earnings are on tap this week, aluminum producer and Dow component Alcoa is expected to kick off the fourth-quarter season next Tuesday.
On the economic front, manufacturing activity expanded to 50.7 in December, rebounding from a contraction in the month prior, according to the ISM. Economists polled by Reuters had expected a reading of 50.3. A reading above 50 indicates expansion in the sector.
Meanwhile, construction spending dipped 0.3 percent to an annual rate of $866 billion in November, declining for the first time in eight months, according to the Commerce Department. Analysts polled by Reuters had expected a gain of 0.6 percent
—By CNBC's JeeYeon Park (Follow JeeYeon on Twitter: @JeeYeonParkCNBC)
Coming Up This Week:
THURSDAY: Challenger job-cut report, ADP employment report, jobless claims, FOMC minutes, Fed balance sheet/money supply, chain store sales, auto sales; Earnings from Family Dollar
FRIDAY: Employment situation, factory orders, ISM non-mfg index, oil inventories, Fed's Yellen speaks; Earnings from Mosaic
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