Stocks plunge one day after Obama reelection

9:54 AM, Nov 7, 2012   |    comments
Photo: Spencer Platt Getty Images
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NEW YORK -- U.S. stocks opened sharply lower Wednesday following the re-election of President Obama. Within minutes of the opening bell, the Dow Jones industrial average was down nearly 200 points.

Investors' initial reaction is decidedly negative over the defeat of the more business-friendly Mitt Romney and the continued gridlock in Congress that will make it tough for lawmakers to avert a fiscal policy crisis by year-end.

Key stock indexes were down more than 1.3 % as the market opened in the U.S.

"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."

In foreign markets, investors seemed not yet ready to overwhelmingly endorse Obama's win. In Europe, key indexes opened higher but reversed course and were all trading lower Wednesday.

London's FTSE 100 was down 0.3% to 5,867.70, France's CAC 40 index was 0.7% lower at 3,455.07, and Germany's DAX 30 index fell 0.8% to 2,286.02. In Asia, markets ended the day mixed.

Some analysts blamed the dropoff in Europe and the pessimistic mood in New York on remarks made by European Central Bank president Mario Draghi about the negative economic outlook for the eurozone, especially the economy of Germany.

But in the U.S., investors are already looking past the hard-fought Obama win and focusing on the virtual status quo that remains in Congress, where Republicans retain control, and the Senate, in which the Democrats still have a slim majority, altered little by picking up two seats.

That means averting the so-called "fiscal cliff" looming in December, when a host of mandated budget cuts and tax cut expirations seem more worrisome than what investors had feared before they knew the outcome of the presidential election. The biggest fear is Washington's potential inability to compromise in a lame-duck session, resulting in a host of tax hikes and spending cuts set to kick in Jan. 1.

One major source of disagreement in the fiscal debate is that Obama wants to boost revenues by taxing the rich. But
Republicans vehemently oppose that approach. Some Wall Street pros, including Ed Yardeni, chief investment strategist at Yardeni Research, believe that Obama's win will result in more turbulent negotiations.

"The chances of going off the cliff probably just increased," Yardeni says.

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."

The dollar is trading stronger against the euro, which dipped 0.4% to $1.2754, 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.

Gold prices had been up as much as 2% overnight but the gains were trimmed to 0.4% by early Wednesday, to $1,725.20, as global investors puzzled over how the election might affect inflation. Crude oil prices were down 1.3% to $87.54.

"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."

Given that the same political players remain to negotiate a deal, President Obama, in his acceptance speech last night, stressed that the need for bipartisanship.

Investors will be closely watching statements from top leaders of both political parties related to fiscal cliff negotiations, notes Tina Fordham, a global strategist at Citigroup. "Their signals matter most," she says.

Before Tuesday's vote, markets overseas had already been pricing in and anticipating a win by President Obama as investors hoped for the continuity, said Jim Welsh, portfolio manager of the Forward Tactical Enhanced Fund. Foreign investors appreciate the "stability that a reelection of Obama would provide," he says.

"An Obama victory will leave less uncertainty for the markets and probably help what's been better sentiment in Asia recently," said Mark Headley of Matthews Asia Pacific fund. Had Romney won, it would have meant "more uncertainty for a world already with lots of uncertainty."

USA Today

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