Markets climb on 'fiscal cliff' confidence

U.S. stocks rose for a second consecutive trading day on Monday, a rebound that analysts are attributing to new-found confidence on reaching a deal to avoid the “fiscal cliff.” 

The Dow Jones Industrial Average closed up 207 points, to 12,795, and climbed more than 300 points from where it stood when President Obama and congressional leaders started a Friday meeting about the cliff.

Stocks started making a comeback Friday, after Obama and top Democrats and Republicans on Capitol Hill suggested that talks over the looming spending cuts and tax increases in the cliff were going well. 

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Markets took a dive just after the November elections put into place at least another two years of divided government. The previous two years had seen both failed fiscal negotiations and brinkmanship over raising the debt ceiling. 

Analysts also chalked up Monday’s market climb in part to a positive report on home-builder confidence. 

Lawmakers on Friday expressed confidence they could reach a deal to avert the tax hikes and spending cuts set for January, which economists have warned could trigger a new recession. If Congress were to do nothing, the combined spending cuts and tax hikes are expected to take more than $600 billion out of the economy in 2013. 

“We all know something has to be done ... we feel very comfortable with each other and this isn't something we're going to wait until the last day of December to get it done,” Senate Majority Leader Harry Reid (D-Nev.) said Friday after the White House meeting. “We have a plan. We're going to move forward on it.”

Speaker John Boehner (R-Ohio) said Friday the parties had developed the "cornerstones of being able to work something out."

"It is going to be incumbent for my colleagues to show the American people that we're serious about cutting spending and solving our fiscal dilemma," Boehner said. "I believe that we can do this and avert the fiscal cliff that is right in front of us today."

The leaders promised to keep working toward a solution through the Thanksgiving break, though Obama has been out of Washington since Saturday on a trip to Asia. 

The focus of the talks is on crafting a combination of spending cuts, entitlement reforms and tax increases agreed upon by Republicans and Democrats.

Obama and Democrats are insisting that wealthier taxpayers pay a higher tax rate. Republicans insist on significant entitlement reforms, arguing that Medicare, Medicaid and Social Security are driving much of the budget problem. 

While the signals from lawmakers have been positive, differences between the two parties over taxes and entitlements remain deep. 

Both sides are also under pressure from their respective political bases not to give up too much in an end-of-year deal that would be voted on during a lame-duck session of Congress.