Dow posts biggest gain in 3 months on tax overhaul optimism

Adam Shell | USA TODAY

Show Caption Hide Caption Tech stocks lift Wall Street to record Tech stocks lifted the major indexes to record highs Tuesday. As Fred Katayama reports, the S&P 500 bolted past the 2600 mark intraday but closed just below it. Video provided by Reuters

The Dow posted its biggest gain since early September amid rising optimism that a tax cut bill is moving closer to reality.

In a sign that the promised tax overhaul from President Trump -- which includes a massive reduction in the corporate tax rate and lower taxes for most individual filers -- is not currently fully priced into the stock market, the Dow Jones industrial average rose 256 points, or 1.1%, Tuesday to close at a record high of 23,836.71.

It was the Dow's best daily gain since a 260 point rise on Sept. 11.

The stock price surge, which also included record highs for the Standard & Poor's 500 stock index, the Nasdaq composite and the small-company Russell 2000, was fueled by news that the Senate Budget Committee cleared the current version of the Republican-led tax bill in a 12-11 vote.

The tax plan is viewed by investors as the centerpiece of Trump's economic stimulus initiatives, as lower taxes for businesses and individuals is seen as boosting the economy, corporate earnings and consumer spending.

"The rally is attributable to progress on the tax bill," says Alan Skrainka, chief investment officer at Cornerstone Wealth Management in Des Peres, MO. "While many market observers say it doesn’t matter, the market clearly believes tax cuts do matter and it is positive for the economy."

While the tax bill still faces uncertainty regarding its passage, "the market is responding positively as we move closer to approval," Skrainka added.

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Stocks also got a boost from the nomination testimony of Jerome Powell, who was selected by President Trump to replace current Federal Reserve chair Janet Yellen. Powell's testimony was viewed positively by Wall Street, as his comments on the Fed's plans to raise interest rates and pare down its huge portfolio of bonds were in line with current Fed policy under Yellen. Powell reiterated that the Fed would take a gradual approach as it winds down its stimulus.

The combination of a consistent message from the incoming Fed chief and progress on tax reform boosted investor sentiment.

"The combination of tax cut news and a friendly central bank is an elixir for the stock market," says David Kotok, chief investment officer at Sarasota, Fla.-based money management firm Cumberland Advisors.

The biggest winners of the day were small-company stocks, as they are domestically focused and will benefit most from lower tax rates. In addition, bank stocks also rallied sharply on Powell's comments on the Fed's plan for gradual rate hikes. Higher interest rates boost bank earnings.

The big rally Tuesday, however, could make the market vulnerable if the progress toward tax cuts stalls out, adds Lindsey Bell, a market strategist at New York-based investment research firm CFRA Research.

"If we get a tax package by the end of the year, the market will likely cheer the news," she says. "But if we don't, or it gets pushed out to the end of the first or second quarter of next year we could see a downtrend in the market, possibly equating to a decline of up to 10%."