Markets Plunge as Election Puts 'Fiscal Cliff' in Focus
Stocks fell sharply Wednesday morning with the Dow down 300 points and trading below 13,000 for the first time since early August. In recent trading, the Dow was down 2.6% to 12,907 while the S&P 500 Index was off 2.7% to 1391.
Coming on the heels of Tuesday's reelection of Barack Obama, the decline could be viewed as a "sell the news" reaction to what most on Wall Street expected. Others claim the market is showing its displeasure with the incumbent, even though the S&P is up more than 50% since Obama took office in 2009.
"I'm not so real convinced this is some kind of reaction to Obama reelection," says my Breakout colleague Jeff Macke. "If you bet on the favorite which is what Obama was you don't get to gloat after. The market expected this."
Rather than the election news, stocks are taking their cues from those time-tested catalysts: Europe's debt crisis and the dollar.
Ahead of a critical austerity vote in Greece, European bourses and the euro were down sharply Wednesday. Cautious comments by ECB President Mario Draghi about Germany's economy and the European Commission cutting its growth forecast for the eurozone to just 0.1% for 2013 vs. 1% in May cast a further pall on the continent.
In response, the euro hit a two-month low at $1.2734 and the U.S. Dollar index hit a two-month high. Generally speaking, so-called risk assets such as stocks and commodities have been moving in opposition to the dollar, so dollar strength is the enemy of the bulls — at least for now.
Markets are also trading on the prospects of a resolution for the so-called fiscal cliff.
As I discuss in the accompanying video with Macke, Henry Blodget and Michael Santoli, the market is fearful that Obama's reelection means a continued stalemate in Washington, where the Republicans maintain control of the House.
House Speaker John Boehner (R-Ohio) is expected to give a statement this afternoon that will call on both sides to seek "common ground," The Hill reports.
But with President Obama already saying he'll veto any agreement that doesn't raise taxes on the wealthiest Americans — one of his key campaign promises — and Republicans saying they won't agree to any tax hikes (period), it's hard to see a consensus emerging anytime soon.
The consensus remains that some deal will be reached prior to Dec. 31 — when automatic spending cuts and tax hike take effect.
"This is not an organic economic or budget problem, it's self created by Congress; therefore it can be deferred," Santoli says. "But ultimately, a deal is the only thing that's possible whether after a cliff, before a cliff or instead of a cliff. It's just a matter of what mixture of negative outcomes we're going to have to swallow."
With two sides seemingly still very far apart and the calendar getting short, market participants are getting a sample of the bitter pill they'd have to swallow, even if Europe wasn't starting to come unraveled yet again.
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