The Dow Jones industrial average soared 207.65 points, or 1.7%, to close… (Mario Tama, Getty Images )
NEW YORK — As goes the "fiscal cliff," so apparently goes the stock market.
The Dow Jones industrial average notched its best gain Monday in more than two months on optimism that feuding lawmakers can avert a potential fiscal crisis before it harms the U.S. economy.
The blue-chip indicator rose more than 200 points and stocks rallied around the globe, easing at least momentarily the selling pressure that had weighed on share prices over the last month.
It didn't seem to matter that investors' optimism was based on the faintest of hope — mild comments from lawmakers that they can stave off the dreaded spending cuts and tax increases that would kick in automatically Jan. 1. And President Obama said he believes that a deal can be struck in time.
But the president and congressional Republicans only had their first post-election meeting Friday, and the broad contours of a deal have yet to take shape.
More than anything, the rally demonstrated the extent to which the market is taking its cue from Washington, even though the presidential election is over.
"Until a deal is struck, the market is vulnerable to both positive and negative headlines and any rumors swirling," said Todd Salamone, senior vice president of research at Schaeffer's Investment Research. "It's going to be a very headline-driven market."
The Dow Jones industrial average soared 207.65 points, or 1.7%, to close at 12,795.96. The broader Standard & Poor's 500 index gained 27.01 points, or 2%, to 1,386.89.
The tech-heavy Nasdaq, which had entered correction territory by falling 11% from its mid-September level, gained 62.94 points, or 2.2%, to 2,916.07.
Investors were buoyed by better-than-expected data reinforcing recent reports showing that the long-troubled housing market is gaining strength.
Sales of existing homes increased 2.1% in October from the previous month, the National Assn. of Realtors said, and a measure of home-builder confidence jumped in November to its highest level since 2006.
The rally was driven mainly by "a little bit of optimism on the fiscal cliff and certainly housing numbers," said Joe Hermes, managing director of Knight Capital Group.
Shares of Apple Inc. surged more than 7% after a story in the financial magazine Barron's said shares of the technology giant look cheap.
Stocks in general have slid over the last month, partly as investors left the market to avoid feared tax hikes on capital gains and dividends that could come next year. Despite Monday's uptick, major U.S. indexes are still down as much as 3% from the Nov. 6 presidential election.
Fear of gridlock in Washington is likely to dominate Wall Street in the final six weeks of the year. That could be exacerbated by light holiday trading volume this week.
Lower volumes of buying and selling on Wall Street can fuel greater volatility in stocks, magnifying perceptions of progress — or deadlock — in fiscal-cliff negotiations.
"It's pretty quiet today and it's probably only going to get worse into Thanksgiving," Hermes said.
Once the fiscal cliff is revolved, other issues are expected to emerge from the background. The November employment report, expected Dec. 7, will shed more light on the labor market's gradual recovery.
Corporate earnings remain a drag on Wall Street. Analysts' pessimism can be seen in their reduced estimates of fourth-quarter growth.
Outside the U.S., the Eurozone debt crisis remains unresolved, with Greece and Spain struggling as the currency bloc fell into recession last quarter.
The Israeli-Palestinian conflict, if it escalates, also could rock markets.
"If Israel starts invading Gaza, the market's going to take that as a big negative," Hermes said.
Larry Palmer, managing director of private wealth management at Morgan Stanley in Los Angeles, said the market's recent swings indicate that investors are nervous.
But he took Monday's rally as a sign that some investors may believe that worry over the fiscal cliff is merely noise. The real news, he said, was Monday's upbeat housing data.
"People are starting to figure out that if the world doesn't in fact come to an end, that equities really aren't that overpriced," Palmer said.
Times staff writer Jim Puzzanghera contributed to this report from Washington.