by Adam Shell, USA TODAY
NEW YORK - Stocks were trading sharply lower Wednesday, one day after the re-election of President Obama. In late afternoon trading, the Dow Jones industrial average was down about 260 points, or 2%.
Investor reaction is decidedly negative over the defeat of the more business-friendly Mitt Romney and the continued gridlock in Congress that makes it tough for lawmakers to avert a fiscal policy crisis by year-end.
The benchmark Dow remains below the psychologically significant 13,000, not seen since Aug. 3. The Standard & Poor's 500 index and Nasdaq composite index were also down about 2% in late afternoon trading, with stocks in nearly every industry lower.
Wall Street pros said negative sentiment was amplified Wednesday after European Central Bank President Mario Draghi expressed concerns ahead of the U.S. market open about the outlook for Europe's economies, especially Germany.
Others said much of the sell-off is coming from computerized trading programs, which trigger huge sell-offs of stocks at pre-set prices hit versus investors making decisions on the spot about what they think of a stock's outlook. One exception: Apple (AAPL) shares are at $558.98, off 3.7% Wednesday. That puts the computer and gadget maker in correction territory, which is still about off 20% from its September intraday high $705.07 a share.
Investors are focusing on what Obama and Congress will do to avert the looming so-called "fiscal cliff." The biggest fear is Washington's inability to compromise in a lame-duck session over a host of mandated budget cuts and tax cut expirations set to kick in Jan. 1. Fears are that lack of a deal will roil markets and derail the economic recovery.
Steven Rattner, a former adviser to the Obama administration and a longtime investment banker, told CNBC in an interview that he couldn't "rule out going over the cliff," putting at zero the odds that the president and Congress could forge a comprehensive fiscal compromise before year-end.
"The chances of going off the cliff probably just increased," says Ed Yardeni, chief investment strategist at Yardeni Research.
It almost certainly will be a struggle just after the hard-fought Obama win since a deeply divided Congress remains at a virtual status. Republicans retained control of the House of Representatives, which has final say over budget issues. In the Senate, Democrats still have a slim majority, altered a bit by picking up two seats.
Given that the same political players remain to negotiate a deal, President Obama, in his acceptance speech, stressed the need for bipartisanship. One major source of disagreement is that Obama wants to boost government coffers by taxing the rich. Republicans vehemently oppose that approach. Some Wall Street pros, including Yardeni, believe Obama's win will make negotiations more difficult.
Investors will be closely watching statements from top leaders of both political parties related to the fiscal cliff, notes Tina Fordham, a global strategist at Citigroup. "Their signals matter most," she says.
"The re-elected president must immediately act to avoid the fiscal cliff," says David Kotok, chief investment officer at Cumberland Advisors. "Massive negotiations lie ahead."
The yield on the 10-year Treasury bond is 1.63%, lower than Tuesday's 1.7%. The dollar closed stronger against the euro, which dipped 0.3% to $1.2767, probably more a reflection of ongoing worries about the debt crisis in Europe. Greece faces its toughest vote yet Wednesday on passing $17.3 billion more in austerity measures to qualify for more bailout funding or default on millions of dollars in loans. The dollar did strengthen slightly, 0.3%, against the yen.
Crude oil prices plunged 4.6% to $84.63 Wednesday on worries of oversupply amid weak global demand. Gold prices had been up as much as 2% overnight as investors debated whether an Obama win would affect inflation. But the gains were erased Wednesday. Gold closed down $4.70 cents at $1,723.90.
Overseas, London's FTSE 100 closed down 1.6% to 5,791.63, France's CAC 40 index finished 2% lower at 3,409.59, and Germany's DAX 30 index ended the day 2% lower to 2,258.59. Many analysts said Europe's markets were pushed down by Draghi's remarks Wednesday about the negative outlook for the eurozone, particularly in Germany, the engine of Europe's economy. In Asia, markets ended the day mixed with no major stock index moves.
In morning trading, the Dow had been down 369 points, raising fears that it would take its biggest one-day point drop in a year. The index lost 389.24 points on Nov. 9, 2011, on eurozone debt fears. The blue-chip average's day-after drop so far puts it on pace for its fifth-worst one-day decline following a Presidential Election Day, according to Bespoke
Investment Group. The worst fall was after Obama's first White House win in November 2008, when stocks ended more than 5% lower.
Only when a deal is forged on tax reform, entitlements and deficit reduction, will investors gain the level of clarity needed to deliver a jolt of confidence to markets, says David Joy, chief market strategist at Ameriprise Financial.
"Investors and companies need to know the rules of the game, whether those rules are to their liking or not," says Joy. "A (fiscal cliff) deal is more important than the fact that the election is over."
"After yesterday's 133-point Dow rally, it is not surprising that we are giving some back because the general perception on Wall Street was that a Romney victory would have been better for markets," says Dan McMahon, director of equity trading at Raymond James. "People will have a lot of concerns about the fiscal cliff (getting resolved) and will again question the economic policies and fiscal prudence of the Obama administration."
Contributing: USA TODAY's Matt Krantz
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