President Obama's reelection and a status quo of Republicans controlling the House and Democrats holding sway in the Senate is leading investors to wonder if they will soon be watching a replay of the debt-limit showdown that sent stock prices tumbling in the summer of 2011. If no resolution is found on the cliff, more than $500 billion in tax hikes and automatic spending cuts could hit the economy early next year. Some analysts warn that the fragile economy could slide into a recession if the higher taxes and budget cuts are not averted.
By late afternoon on Wednesday, the Dow Jones industrial average was down around 250 points, in large part on anxiety over the fiscal-cliff implications of continued divided government. Market prognosticators had suggested that no matter who won the White House, financial markets would be boosted by one party coming away with a clear mandate, ensuring diminished gridlock (though many had said a win by Republican Mitt Romney would be a boost for the stock market at least in the short term).
No mandate was given last night, and the Dow on Wednesday seemed to confirm Goldman Sachs economist Alec Phillips's fear that markets would take a huge hit if the cliff ends up hitting "because of a political stalemate that nobody knows how to resolve."
Moody's Investors Services indicated on Wednesday that it would not necessarily downgrade the United States' credit rating immediately if the economy temporarily goes over the cliff, but it would closely watch upcoming budget negotiations.
Markets were also roiled by reports of rioting in Greece and comments from European Central Bank President Mario Draghi that the eurozone's debt crisis is starting to hurt Germany. The tumble--the largest in a year--also stemmed from sell-offs in specific sectors that would likely have benefited from a Romney victory, as coal, financial, energy, and defense holdings were offloaded.
Business owners have voiced concern over the fiscal cliff in recent months, even undertaking a letter-writing campaign urging Congress and the White House to compromise. Wednesday's sell-off was in some ways unsurprising--now that the election has passed, investors are also turning their attention to the fast-approaching cliff.
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