NEW YORK -- It appears that Wall Street really did prefer the more
business-friendly Mitt Romney to manage the economy from a desk in the
An Obama stock market "bounce" never materialized
after his re-election. Stocks, instead, fell with a thunderous thud
Wednesday on news that the president, who gets low grades from investors
on his business acumen, will be in charge of USA Inc. for another four
"There was a general view in the market that a Romney win
would be more favorable to stocks," says John Praveen, chief investment
strategist at Prudential International Investment Advisors. Many
investors had apparently held out hope for a Mitt Romney victory.
the ink barely dry on Obama's upbeat acceptance speech, the mind-set of
Wall Street investors took a quick, downbeat, bearish turn. It was as
if investors all hit a button at the same time that switched the market
into worry-only mode, erasing any positive market-related vibes that
might have existed a day earlier.
Fear that the nation's fiscal
crisis would not be resolved in time to avoid falling off the edge of
the so-called fiscal cliff intensified, as did fears that chronic
uncertainty would infect the market through year's end.
that Obama's plans to increase taxes on both capital gains and dividends
would reduce investor appetite for stocks - and even spark selling
before the tax bite kicks in -- also took hold.
Stocks that would
be hurt by Obama's preference for stiff regulations, such as banks,
sold off sharply. And to make matters worse Wednesday, worries about
Europe's debt crisis returned to the top of investors'
Add it all up and what you get is a
"Molotov cocktail that created a pretty severe bout of selling," says
Andy Busch, a public policy strategist at BMO Capital Markets.
say the negative mood hurt stocks would be an understatement, as Wall
Street was awash in red ink all day. The damage inflicted was severe.
About $400 billion in stock market value vanished in the trading
session, according to Wilshire Associates.
The Dow Jones
industrial average suffered its worst point drop since last November,
plunging 313 points, or 2.4%, to 12,933. It was the fifth-worst drop
following an Election Day since 1900, Bespoke Investment Group says. The
biggest loss following a presidential election was four years ago when
the Dow tumbled 5% after Obama won his first term in office.
the down session, the Dow remains up nearly 6% for the year. The gains
have been powered by an easy-money policy from the Federal Reserve, a
housing comeback and resilient consumers who are keeping the economy
There were no shortage of theories on Wall Street as to why the market reaction was so violently negative.
the most blame was the belief that the status quo election result --
with Obama holding on to his job and the Democrats retaining power in
the Senate and the Republicans protecting their turf in the House of
Representatives -- will translate into legislative gridlock that could
jeopardize a deal getting done in Congress by year's end to avert the
"While both presidential candidates were silent
about the fiscal cliff during the debates and the election season, it is
now the No. 1 issue facing investors," says Barbara Novick, head of
government relations for money management firm BlackRock.
The fiscal cliff is the term to describe the growth-killing impact of
more than $600 billion in coming tax increases and government spending
cuts on Jan. 1 unless Congress acts to avert it.
While gridlock is
often considered bullish for stocks, because it makes it tough for one
political party to push through its own agenda with little opposition,
it is viewed as a negative now because many believe the economy will
likely fall into recession early next year if the fiscal cliff is not
resolved. And a recession spells trouble for corporate earnings,
business confidence and stock prices.
Sure, the election ended one
big uncertainty for the stock market. Investors now know that it will
be operating under well-known Obama policies. The president wants to
tax the wealthy to help pay down the deficit, impose more regulations on
banks and other industries and continue to fund his health care law.
But the fiscal cliff is the latest uncertainty to undermine investor confidence.
are none the wiser about if, how and when Congress will deal with the
colossal tightening in fiscal policy scheduled to occur early next
year," Julian Jessop, an analyst at Capital Economics in London, told
clients in a research note.
Other reasons cited for Wednesday's
market swoon include fears that Obama's plan to increase taxes on stock
capital gains and dividends will reduce demand for stocks, as investors'
after-tax returns will shrink as a result. Many investors are probably
already selling to avoid paying the higher tax rates, says Busch of BMO
Lingering disappointment that Romney didn't pull
off the upset also likely sparked some selling, adds Chris Verrone, an
analyst at Strategas Research Partners. "The market was probably holding
out some hope that Romney had a shot," he says.
out of Europe Wednesday that suggested the eurozone would be stuck in an
even deeper economic slump this year than expected also hurt sentiment
as it means slower growth ahead, adds Praveen.
So what will it
take for Obama to get back in Wall Street's good graces? Here are five
things Wall Street pros interviewed by USA TODAY said Obama can do to
promote a better market environment and get stocks moving north again.
Wall Street's five-step to-do list for President Obama:
1. Get a fiscal cliff deal done. Failure
to broker a deal means a recession is imminent. And that's bad news for
U.S. investors, workers and employers. Letting the Bush tax cuts expire
alone will take $127 billion out of the pockets of Americans. "Failure
to avoid the fiscal cliff," says Praveen, "will damage the economy and
"No deal," Novick says, "means a tax hike for millions."
on Wall Street say there is enough at stake and enough incentive on the
part of Obama and lawmakers to broker a deal, even if it comes at the
11th hour or simply limits the full impact.
"Shaving the fiscal
cliff to a bump can make it easier to overcome," says Mark Luschini,
chief investment strategist at Janney Montgomery Scott.
2. Extend an olive branch to Republicans.
It will take negotiation on the part of Obama to cement a
much-hoped-for "grand bargain" with Republicans needed to make the
long-term fixes to tax policy, entitlements and deficit reduction that
will put the U.S. economy on a sustainable path, adds Praveen.
such a grand bargain is unlikely to come this year due to a lack of
time, Wall Street would like to see the president moving in that
direction, adds Novick.
3. Roll back onerous regulations.
Stiff regulations imposed on banks, oil exploration companies and coal
companies by Obama are crimping economic growth, corporate profitability
and business opportunities in these industries, says George Schwartz,
president of both Schwartz Investment Counsel and the Ave Marie Mutual
"He's got to roll back the regulations if he wants to create jobs, boost the economy and help generate wealth," he says.
4. Come up with credible plan to boost hiring. The
economy is growing at a subpar 2% pace and the unemployment rate is
still near 8%. That's not good enough, says Praveen. "Obama has to
figure out creative ways to stimulate the economy," he says. Jobs
programs would help. Easing regulations will also help. As will giving
CEOs the confidence to invest. "He needs to be a little more
pro-business," adds Praveen.
5. Rethink higher taxes on stock gains.
If Obama allows the Bush tax cuts to expire and rates on capital gains
rise from 15% to 20% and dividend income goes from 15% to the higher
individual tax rates, it will reduce the attractiveness of stocks, says
Busch. "By hiking rates on stock gains you are basically incentivizing
investors to sell now to avoid paying the higher tax rate next year," he
There is one big thing that can go right for stocks. The
biggest, of course, is if the fiscal cliff gets resolved, says Peter
Hayes, head of BlackRock's municipal bond group.
"When the market
sniffs out a possible compromise on the cliff and they see no big hit to
the economy, you will see a gradual move back into risk assets like
stocks," he says.