Why Stocks May Keep Falling: 'The Sugar High Will End'
Investors cast their own vote on the presidential race Wednesday, and the result was a landslide rout that could have lasting repercussions beyond Tuesday's results.
A day after President Barack Obama stormed past Republican challenger Mitt Romney, the stock market sent a clear message: There's still a lot more to do than win a campaign.
Market experts said a confluence of factors are poised to make for a difficult environment that could last well into 2013, which traditionally would be a slow year outside of all the present headwinds.
Theories abounded on why the market tumbled. They ranged from worries over the "fiscal cliff" of tax increases and spending cuts, as well as troubles in Europe, a slowdown in the U.S. and questions over the efficiency and effects of Federal Reserve policy. (Read More: For Investors, More Fed Easing, Cliff 'Heart Attack')
More broadly, the aggressive sell-off came as little surprise considering the array of challenges Obama faces in his second term and the record of infighting between the White House and Congress.
"Economic prospects might not have been much different if Mitt Romney had won, especially as Congress remains divided. But the subsequent weakness in equities makes sense too," Julian Jessop, chief global economist at Capital Economics, said in a note to clients. "As we had anticipated, the focus has quickly moved on to the uncertainty over the 'fiscal cliff,' and perhaps back to the unsolved crisis in the euro-zone as well."
Getting the election over, in fact, was just one of the key obstacles facing the market. But at least with the Obama-Romney race, there was a clear winner.
The European and fiscal issues, as well as the nuclear conflict with Iran and other challenges, pose less certain outcomes that will stretch over months if not years. (Read More: Merkel Wants Overhaul of Euro Zone in 2-3 Years)
"The re-election of President Obama removes one uncertainty that has been weighing on the markets over the last few months. But they 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," Jessop said.
"And with Congress still split, President Obama will struggle to garner bipartisan support for a more comprehensive agreement that addresses the longer term issue of how to put the nation's finances back on a sustainable path," he added.
Reacting to the list of uncertainties, traders slammed on the brakes and pushed major indexes more than 2 percent lower.
The market plunge was on pace for the fifth-worst day-after-election drop since 1900. The worst, a 5 percent slide, came in 2008, after voters awarded Obama his first term in office, according to Bespoke Investment Group.
How far and how long the downward momentum will last is uncertain, but the early signs aren't good. Immediate post-election declines have historically preceded another 1.7 percent drop in the market by the end of the year. (Read More: Fixing 'Fiscal Cliff' Will Mean 'High, Higher' Taxes: Gross)
Heading into 2013, Obama faces a historical trend that indicates the first year of a presidential cycle also is not usually positive for the market.
The average market gain for the post-election year is just 1.7 percent, with negative results 24 times against 20 positives.
"The stock market will suffer over the 12-month period, which always happens the year after an election," said Len Tannenbaum, CEO of Fifth Street Finance in New York.
Tannenbaum said the effects of the Federal Reserve's quantitative easing debt-buying program will fade this year after helping boost equity performance throughout Obama's first term.
"The market has been propped up by these sugar highs," he said. "QE half-trillion a year is not sustainable in the long run. The sugar high is going to end because Barack Obama is going to raise revenue and cut entitlements. The combination of the two cannot be good for the economy."
Indeed, economists have been busy cutting numbers for future growth in the wake of Hurricane Sandy as well as the drag effects from whatever solutions are devised to avoid the fiscal cliff.
Goldman Sachs on Wednesday cut its fourth-quarter gross domestic product forecast from 1.9 percent growth to 1.5 percent. The cuts were based on the likelihood that Obama will kill the George W. Bush-era tax cuts for those making above $250,000, and the drag that Superstorm Sandy will have on the economy.
What's more for investors, the landscape could be changing in other ways.
Investors have watched stocks all rise or fall together — a trend called "correlation" — as Fed policy has shaped market behavior.
Now, that could be changing as stock-picking comes back in view and investing is no long as easy as picking the right index fund.
"The sort of risk-on risk-off for markets that has dominated basically since the collapse of Lehman Brothers is coming to an end. Selectivity is returning," said Lee Ferridge, head of macro strategy for North America at State Street Global Markets. "What we're going into and what we will see for the rest of the year and in 2013 is a much more domestic story. In stocks that's going to mean individual stories. Stock picking could come back."