Adam Shell, USA TODAY
NEW YORK - Stocks were trading sharply lower Wednesday, one day after the re-election of President Obama. In morning trading, the Dow Jones industrial average was down more than 320 points, or 2.4%.
The Dow's plunge puts it on track for its biggest one-day point drop in a year. The index lost 389.24 points on Nov. 9, 2011, on eurozone debt fears.
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 is trading below the psychologically significant 13,000, lowest since Aug. 3. And the Standard & Poor's 500 index and Nasdaq composite index were also down 2.5% in morning trading, with stocks in nearly every industry lower.
Wall Street pros said much of the sell-off is coming from computerized trading programs, which trigger huge sell-offs of stocks when certain price levels are hit versus investors who are making decisions in the moment to sell. Others said negative sentiment was amplified 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.
Regardless, investors are 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, may be more difficult than what investors had feared before they knew Obama had won. The biggest fear is Washington's potential 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.
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 Yardeni, believe that Obama's win will result in more turbulent negotiations.
Given that the same political players remain to negotiate a deal, President Obama, in his acceptance speech last night, stressed 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.
In foreign markets, investors seemed unwilling to endorse Obama's win. London's FTSE 100 was down 1.4% to 5,805.70, France's CAC 40 index was 1.7% lower at 3,420.26, and Germany's DAX 30 index fell 1.7% to 2,264.81. In Asia, markets ended the day mixed. 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.
All other issues aside, "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%, sharply lower from Tuesday's 1.7%. The dollar is trading stronger against the euro, which dipped 0.4% to $1.2764, 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 3.3% to $85.77 Wednesday. Gold prices had been up as much as 2% overnight but the gains were erased Wednesday, with gold down $11.60, or 0.7%, to $1,707.60, as global investors puzzled over how the election outcome might affect inflation.
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."
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."
Contributing: USA TODAY's Matt Krantz