Traders Fear a Nasty Season For Stocks

The election season could give way to a nasty season for stocks if Washington doesn't show a willingness to compromise on fiscal issues.

Obama Re-elected as Crucial Ohio Goes His Way
Saul Loeb | AFP | Getty Images

That fear is one of the biggest immediate concerns for markets after Tuesday's presidential election, which saw the re-election of President Barack Obama. Democrats retained control of the Senate, and Republicans kept their majority in the House, all a recipe for Congressional gridlock.

Stocks sold off Wednesday for several reasons, but a main one cited by traders was the possibility that now the election has passed, Congress and the White House will not be able to compromise on fiscal matters and the economy will pay the price.

The White House reported Wednesday that Obama had already made calls to Congressional leaders in both parties, looking for cooperation and a willingness to compromise on the "fiscal cliff."

The Dow was off 312 points to 12,932, and the S&P 500 slid 33 to 1394. It was the second worst post-election rout since the late 1940s. The worst was in 2008, during the height of the financial crisis when Obama was first elected, and the Dow fell 5 percent. There was also a flight to safety in the bond market, where the yield on the 10-year touched a low of 1.62, well below the 1.75 percent yield it saw earlier this week.

"This to me is likely more of a kind of one-time reset here," said Jack Ablin, CIO of BMO Private Bank. "I don't necessarily see this as a technical breakdown, or anything like that. I think equities are reasonably valued at 1400."

(Read More: Fixing 'Fiscal Cliff' Means 'High, Higher' Taxes: Gross)

"We're expecting $100 earnings (for the S&P 500) next year, and that's substantially below what analysts are expecting right now," he said. "That should be able to support 1400. I'm not too worried about the bottom falling out. Investors like scenario analysis, and they're going to scare themselves with the low probability outcomes."

The cliff negotiations could be as stressful for market as the Congressional debt ceiling negotiations, which ultimately led to the downgrade of the U.S. triple A credit rating in the summer of 2011. Traders will no doubt obsess about every comment and development, much as they have about European sovereign developments, still a worry for markets. That certainly was the case Wednesday.

"The bottom line is if the fiscal cliff isn't dealt with, you're going to see equities trend lower," said Joseph LaVorgna, Deutsche Bank chief U.S. economist and a CNBC contributor.

House Speaker John Boehner helped break the ice Wednesday afternoon by promising a willingness to raise taxes under certain circumstances. The fiscal cliff is the end of year expiration of Bush tax cuts, and the automatic spending cuts that were agreed to as part of the debt ceiling deal. Those spending cuts are viewed as onerous and are especially deep on defense spending. But the biggest hit from the cliff would be the slam on the economy if all Bush era tax cuts are allowed to expire, including a reversion to higher tax rates, and a big hike in dividend and capital gains taxes.

(Read More: What's Behind Financials' Post-Election Dive?)

"Maybe I'm naïve but I think the political edge is off on both sides. There's nothing left to prove. (Obama) He can't run again so he's not looking to be re-elected. The Republicans know they're going to have a shot next time. It's really up to them," Ablin said.

Meanwhile, Europe was also a concern on Wednesday, and traders are now especially focused on Thursday's meeting of the European Central Bank and press briefing by ECB President Mario Draghi. Draghi spooked markets Wednesday when he said the economic slowdown was now affecting Germany, the stalwart of the European economy. Later on Wednesday, Greece's parliament, by a thin majority, approved an austerity package required for its aid deal, against a backdrop of violent protests.

What Else to Watch

Traders Fear a Nasty Season For Stocks
Bloomberg | Getty Images

U.S. economic reports will also be of interest Thursday. Weekly jobless claims are expected to total 365,000, but economists say there may be some impact from Super Storm Sandy, which could impact the 8:30 a.m. ET number. There is also international trade data for September, also at 8:30 a.m.

(Read More: Why 'Rise Above?')

"Claims are tricky because if you look at the two previous hurricanes, they're different but there was no clear signal on claims initially," LaVorgna said. He said the international trade number could be important and lead to a possible upward revision to GDP for the third quarter, now at 2 percent.

There are also a number of companies reporting earnings, including Siemens, Dean Foods, Duke Energy, First Energy, Kohl's, Tim Horton's, Scotts Miracle-Gro, Wendy's and Anglogold Ashanti, before the opening bell. Disney reports after the closing bell, as does Groupon, Nordstrom, Public Storage, Energizer, Great Plains Energy, Zipcar, and Kayak Software.

Earnings to Watch


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