Stocks fall on post-election worries about fiscal cliff
WASHINGTON — Financial markets plunged as concerns about Europe’s economy combined with the morning-after reality that the U.S. elections left the same gridlocked politicians to deal with the fast-approaching fiscal cliff.
The Dow Jones industrial average fell 313 points, or 2.4%, on Wednesday to its lowest level in three months. The broader Standard & Poor’s 500 index also ended the day down 2.4%, and the Nasdaq was off 2.5%.
Investors worried that another recession loomed next year unless newly reelected President Obama and still-strong congressional Republicans could stop the large tax hikes and government spending cuts that kick in Jan. 1.
“We’ve gotten certainty on the presidency and now we move into the uncertainty of where we were before — the fiscal cliff,” said Quincy Krosby, market strategist at Prudential Financial. “The market’s not going to have much patience to wait to see when the negotiations begin in earnest and how they evolve.”
Sectors in Washington’s fiscal or regulatory cross-hairs — defense, healthcare, energy and financial — took drubbings. Big banks, which are subject to many new financial rules championed by Obama, got hammered.
Goldman Sachs Group Inc. lost $8.27, or 6.6%, to $117.98. JPMorgan Chase & Co. lost $2.40, or 5.6%, to $40.48. Morgan Stanley plunged $1.56, or 8.6%, to $16.63. And UnitedHealth Group Inc., the health insurance giant, lost $2.13, or 3.8%, to $54.26, as hopes for a repeal of Obama’s healthcare reform law faded with his reelection.
More signs of trouble regarding the European debt crisis also pushed markets lower. European Central Bank President Mario Draghi said new data indicated that the fiscal problems were starting to affect Germany, the Eurozone’s strongest economy. Growth forecasts for the region were downgraded.
And riots broke out in Greece ahead of the Greek parliament’s narrow approval of a tough new round of spending cuts.
But most of the attention was on Washington. Fitch Ratings, one of the three leading credit rating companies, highlighted the stakes facing politicians in the coming weeks.
The firm declared there would be “no fiscal honeymoon” for Obama, warning that the U.S. probably would face a ratings downgrade if a deal could not be brokered to stave off the fiscal cliff and to increase the nation’s debt ceiling again.
Business leaders said that with the bitter presidential and congressional elections over, it was time for Democrats and Republicans to join together and prevent another fiscal crisis.
“The most important mandate coming out of this election is fixing the problems we knew we had to fix,” said Jay Timmons, president of the National Assn. of Manufacturers.
The challenge is huge.
At the end of the year, the George W. Bush-era tax cuts and the temporary payroll tax break expire. At the same time, deep automatic spending cuts are mandated by law to reduce the deficit. The Congressional Budget Office and most economists believe the one-two fiscal punch — about a $500-billion blow to the economy next year — would trigger another recession.
In addition, the government will hit its $16.4-trillion debt limit near the end of the year. Treasury officials said they could take steps to allow continued borrowing, but the nation would face a possible default early in 2013 if the limit isn’t increased.
Thus far, there’s little evidence that concerns about higher taxes have had a significant effect on American consumer spending. But going over the cliff could jolt confidence as middle-income families would see their taxes increase by almost $2,000 next year.
Renewed concerns about the fiscal cliff come as the recovery is showing signs of strengthening a bit.
The housing market is coming back to life, consumers are spending more for cars and other things, and hiring has picked up in recent months. The unemployment rate fell below 8% this fall for the first time since early 2009 and now stands at 7.9%.
Yet even if lawmakers push off many of the spending cuts and tax increases, analysts at PNC Financial Services see some fiscal contraction. They expect the Social Security payroll tax to go back up to 2010 levels.
“This will weigh on growth, particularly in the first half of next year, a major reason why the recovery will remain moderate in the near term,” they said in a research note Wednesday.
Obama and members of Congress have pledged to try to agree on a broad deficit-reduction plan to avoid the fiscal cliff. But Tuesday’s election sent mixed messages from the voters.
The president was reelected on a platform of allowing the tax rates to expire for wealthy Americans. Republicans retained the majority in the House by running on a pledge of no increases in tax rates.
House Speaker John Boehner (R-Ohio) tried to strike a conciliatory tone Wednesday even as he reiterated his opposition to tax rate increases. Boehner said he was open to a deal that produced higher tax revenue through economic growth and reductions in loopholes, as long as it came with major changes to Medicare and Social Security.
“We won’t solve the problem of our fiscal imbalance overnight and certainly won’t do it in a lame-duck session of Congress,” Boehner said. “And it won’t be solved simply by raising taxes or taking a plunge off the fiscal cliff.”
John Engler, president of the Business Roundtable, an association of leading corporate chief executives, said a one-year extension of the tax cuts would reduce the “uncertainty hanging over Washington like a dark cloud” and set the stage for the elusive grand bargain on deficit reduction between Republicans and Democrats.
Many businesses said economic and political uncertainties already have cut into investment and hiring, contributing to weaker economic growth. Tuesday’s election settled the political situation, but the fiscal worries remain.
“It does sound ironic — businesses saying, ‘We can’t stand this uncertainty, please give us another year of it,’” said Ken Simonson, chief economist at trade group Associated General Contractors of America. “It shows uncertainty is not the worst evil; it’s a lesser evil than going over the cliff.”
Fitch said that a failure by politicians to end the fiscal standoff probably would lead it to downgrade the U.S. AAA rating. Moody’s Investors Service issued the same warning in September. After the contentious fight over raising the debt limit in 2011, Standard & Poor’s downgraded the U.S. rating to AA+ from AAA.
“Avoiding the fiscal cliff and a timely increase in the debt ceiling would support the economic recovery and send a positive signal that agreement can be reached on a credible plan to reduce the federal budget deficit and stabilize federal debt,” Fitch said.
“Conversely, failure to reach even a temporary arrangement to prevent the full range of tax increases and spending cuts implied by the fiscal cliff and a repeat of the August 2011 debt ceiling episode would mean that the general election had not resolved the political gridlock in Washington,” the company said.
Puzzanghera and Lee reported from Washington; Tangel from New York.
