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US stocks plunge 2% after Obama's election as Europe woes deepen

US stocks fell more than 2% on Wednesday, putting the S&P 500 on track for its biggest drop since June, as investors shifted their focus to a looming fiscal showdown in Congress after President Barack Obama's re-election.

india Updated: Nov 08, 2012 15:07 IST

US stocks fell more than 2% on Wednesday, putting the S&P 500 on track for its biggest drop since June, as investors shifted their focus to a looming fiscal showdown in Congress after President Barack Obama's re-election.

Energy, healthcare and the banking sectors were among the hardest hit after Obama defeated Republican Mitt Romney, whose policy positions favored those industries. Defense shares also plunged.

Adding to the weaker sentiment were renewed worries about economic troubles in Europe, a key market for many US companies. The euro zone economy will barely grow next year but pick up in 2014, the European Commission said. The region's economy would grow only 0.1% in 2013 after a bigger than previously forecast contraction this year.

"Traders on the floor are thinking, before the election President Obama wasn't able to resolve the fiscal cliff so what makes you think he's going to be able to do it after the election? That's the big issue right now," said Todd Schoenberger, managing principal at the BlackBay Group in New York.

Barack Obama's re-election as US president set the stage on Wednesday for a fresh political battle over the year-end "fiscal cliff" budget crunch which threatens to force the economy back to recession.

Republicans left Obama little time to savor his victory, after having foiled multiple attempts at a long-term deal to bring down US debt and deficits through a combination of moderate spending cuts and tax increases.

House Speaker John Boehner drew a line in the sand Tuesday night even before Obama's win was sealed.

"The American people want solutions -- and tonight, they've responded by renewing our House Republican majority," Boehner said.

"With this vote, the American people have also made clear that there is no mandate for raising tax rates."

Boehner scheduled a statement for Wednesday afternoon on the fiscal cliff "and the need for both parties to find common ground and take steps together to help our economy grow and create jobs, which is critical to solving our debt."

The cliff is a poison-pill law never meant to be implemented.

To overcome a political stalemate over raising the US government's borrowing ceiling in August 2011, Republicans and the White House made a deal: if they could not agree on a more moderate schedule to reduce the $1 trillion a year deficit, they would have to automatically implement a harsh plan of spending cuts and tax increases beginning in 2013.

The plan in effect would suck nearly $600 billion out of the economy in the first year, sending it back into recession with soaring unemployment, according to the Congressional Budget Office.

Such a specter was meant to be motivation enough to strike a more moderate compromise, but in the long and tightly fought election battle that never happened.

Pressure to reach a deal has mounted from the US business community and global economic leaders.

If the economy goes over the cliff, "It will take most of the decade for economic activity and employment levels to recover from the fiscal shock," the National Association of Manufacturers said.

At a meeting in Mexico last week, the G20 economic powers and the International Monetary Fund warned the cliff threatened global economic growth.

The worries were clear in the market: seeing the Congress still divided, US stocks plunged Wednesday.

"A compromise at the eleventh hour seems likely. But in the meantime, the uncertainty could keep the heat on the US stock market," said Capital Economics analyst John Higgins in London.

In his victory speech Obama signaled he was ready to work on the problem.

"Tonight, you voted for action, not politics as usual," he said.

"And in the coming weeks and months, I am looking forward to reaching out and working with leaders of both parties to meet the challenges we can only solve together: reducing our deficit reforming our tax code fixing our immigration system freeing ourselves from foreign oil."

But neither side appeared ready to compromise on the tax issue. In recent weeks Obama said he would reject any plan that did not include higher taxes for the wealthy.

Much depends on weather Obama can leverage his solid win to weaken the Republican position.

But with another wrinkle -- the need to raise the country's borrowing ceiling again by the beginning of January -- Nigel Gault of IHS Global Insight expressed his doubts.

"We may briefly go off the cliff in early 2013 before an agreement is reached, creating the risk of financial turmoil at year-end," he said of the Obama victory.

"The fact that the debt ceiling will need to be raised sometime early in 2013 adds an unwelcome extra complication."

Stocks plunge
The Dow Jones industrial average was down 329.86 points, or 2.49%, at 12,915.82. The Standard & Poor's 500 Index was down 36.03 points, or 2.52%, at 1,392.36.

The Nasdaq Composite Index was down 76.72 points, or 2.55%, at 2,935.21. The S&P 500 also below the key 1,400 level for the first time since September 4.

Wednesday's drop is a reversal from the prior session's gains when voting was under way. Defense and energy shares were
among the market leaders that day.

"The market is telling us that it was pricing in the potential for a Romney victory, based upon the rally over the past few days," said Phil Orlando, chief market strategist for equities at Federated Investors Inc of Pittsburgh.

On Wednesday, an index of defense shares was down 3.8%, its biggest one-day drop in a year. Shares of United Technologies were down 3.5% at $77.14.

Washington must next focus on some $600 billion in spending cuts and tax increases due to kick in next year that could derail the economic recovery, hence the "fiscal cliff" nickname.

Among sectors, the S&P energy index dropped more than 3% as investors fears companies in the sector will likely see more regulation in Obama's second term, with less access to federal lands and water.

Other decliners in the energy area included Arch Coal down 13.3% at $7.50 and Alpha Natural Resources off 12.8% at $8.39.

Healthcare stocks also fell, as President Obama's re-election rules out the possibility of a wholesale repeal of his healthcare reform law, but questions remain as to what parts of the domestic policy will be implemented. The S&P health care
index lost 2.5%.

The S&P financial index was down 3.1%.