Wall Street Casts Its Vote: 'The Market Is Going Down'

Fears that President Barack Obama's re-election could send the U.S. economy and country over the "fiscal cliff" helped trigger a major stock market sell off and sent investors into the safety of Treasurys.

Wall Street Casts Its Vote: 'The Market Is Going Down'
Joel Carillet | Getty Images

With a wary eye on Europe's continuing debt drama, investors also reacted to warnings, first from Fitch, then Moody's that the rating agencies stand ready to cut the U.S. triple A credit rating if responsible fiscal actions are not taken. Standard and Poor's already took action on the rating in 2011.

(Read More: Debt Threats From Ratings Agencies)

"The market is going down. The market does not want another four years of Obama. It does not want these tax hikes on a fragile economy," said Peter Boockvar, Miller Tabak strategist. "We have an economy that's barely staying above recession. Europe's problems are deepening. Now we have the prospect of higher taxes."

Boockvar pointed out that the Treasury's auction of $24 billion in 10-year notes at 1 pm Wednesday was surprisingly weak. The yield was 1.675 percent, and the bid to cover, at 2.59, was below the 12-month average.

(Read More: Treasurys Still Rally Despite Weak Auction)

"I can only speculate. We know a dovish Fed will be with us for another four years, with all the money printing and dollar debasement it brings. It was a squishy auction," he said.

The stock market selloff, with the Dow down more than 2 percent, was the second worst post election sell off since the late 1940s. The worst was in 2008, when Obama was first elected and the financial crisis was in full swing. That day, the Dow declined 5 percent.

(Read More: Stocks Dive 2% as Dow and S&P Skid)

Wall Street had favored Romney and the Republican ticket in part because it preferred their approach of retaining tax cuts, and making spending cuts. The Obama Administration favors raising taxes on the richest Americans, and also increasing capital gains and dividend taxes.

The fiscal cliff is the dual expiration of Bush-era tax cuts and the beginning of automatic spending cuts that take place starting Jan. 1 if there is no action by Congress. The spending cuts were agreed as part of the Congressional compromise on the debt ceiling and were viewed as so onerous that they would force Congress to act.

"I really think that we are going to see some pretty signifiant volatility that enters the market as we deal with this uncertainty back again about the fiscal cliff, and about the Administration and what theyr'e going to do with tax increases on rich people and potentially on dividends and capital gains," said Jeff Gundlach, CEO of Doubleline Capital, who appeared on "Fast Money Half-Time Report."

Bond yields fell as investors looked for a safe haven. The 10-year yield fell as low as 1.61 percent, well below the 1.75 percent it was at on Tuesday.

"The bond market is making a comment here," said CRT Capital chief Treasury strategist David Ader, in a note.

Ader said the fiscal cliff issues will impact already sluggish GDP growth. "That's 'good' for rates and keeps the Fed easy," he noted, and ultimately when rates rise, it would hopefully be offset by an improving fiscal story and less accommodative bond market.

Markets are looking for an immediate spirit of compromise. Already on Tuesday, Speaker John Boehner said that voters made clear there is no mandate for higher taxes, by keeping Republicans in control of the House.

"This doesn't' look like the government coming toward the middle to me. A divided government with hardened positions. Who knows, maybe the president wakes up and says my political career is over and he wants to be the great healer," said Barry Knapp, head of equity portfolio strategy at Barclays.

"I think the government looks very polarized, and the probability of going off the fiscal cliff goes up, and the outlook or the market looks negative. I don't see any silver lining in it," said "I clearly thought that a status quote election was negative," Knapp said. "We've had business confidence falling sharply. We've had capital spending contract. You can see it in the performance of tech stocks and industrials and in corporate earnings, and I think this is a negative outcome."

Ader said there may ultimatley be compromise, along the lines of Bowles-Simpson, a bipartisan plan to balance tax increases and spending cuts.

"This election admonishes the GOP, make no mistake, and perhaps has sobered Democrats as well," he wrote. "...I think he'll (Obama) be more conciliatory and more inclined to follow the bipartisan Bowles Simpson plan and expect the GOP conciliators too, will want to achieve more than simply being the petulant party to dig in its heels and achieve nothing."

(Read More: Get Ready for Cheap Money 'Run Amok': Rogers)

The U.S. was downgraded by Standard and Poor's after the debt ceiling battle in August, 2011, when Congress failed to take major steps to address the country's fiscal problems. There is concern that the failure to find a path to tackle the fiscal issues will result in another downgrade of the U.S. credit rating.

As Congress struggles with the cliff, the Fed will continue its easing programs, which were criticized by Romney and his running mate, Rep. Paul Ryan, R-Wis. "Gold is hanging in because Bernanke will keep doing it," said Boockvar. "With Obama, it's still certainly a green light."

Stocks bounced on Tuesday on relief that the election would bring an end to uncertainty. There was also some speculation that perhaps Romney could pull off a victory and stocks that would do better under Republicans moved higher.

But many of the stocks that rose Tuesday were sold Wednesday, including coal, energy, and managed care shares.

Follow Patti Domm on Twitter: @pattidomm

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