(AP) - The election behind them, U.S. investors dumped stocks
Wednesday and turned their focus to a world of problems - economically harmful
tax increases and spending cuts at home and a deepening recession in Europe.
The Dow Jones industrial average
plunged as much as 245 points in the first hour of trading, and the Standard
& Poor's 500 index fell as much as 27, or 1.6 percent. Energy companies and
bank stocks took big losses.
Stocks
seen as benefiting from President Barack Obama's decisive re-election rose. They
included hospitals, free of the threat that a President Mitt Romney would have
sought to roll back Obama's health care law, and renewable-energy companies.
With the campaign resolved, traders'
attention returned to an increasingly ill European economy, dragged down by a
debt crisis for more than three years. The 27-country European Union said
unemployment there could remain high for years.
The European Commission, the executive arm of the EU, said
that it expects the region's economic output to shrink 0.3 percent this year. In
the spring, the group predicted no change.
For next year, the commission predicted 0.4 percent growth,
barely above recession territory. It predicted 1.3 percent last spring.
The EU also predicted a larger decline
for the 17 nations that use the euro currency: 0.4 percent this year, slightly
worse than a previous estimate of a 0.3 percent decline.
Mario Draghi, president of the
European Central Bank, also warned that economic powerhouse Germany is no longer
insulated from the region's troubles.
In the U.S., stock futures were higher overnight, after Obama
cruised to victory. They turned sharply lower after the European forecasts.
Obama's win came after a costly
campaign that blanketed markets with uncertainty about possible changes to tax
rates, government spending and other issues seen as crucial to the prospects of
some industries and the U.S. economy.
As those concerns subsided, traders confronted an ugly
reality: The so-called fiscal cliff, which will impose automatic tax increases
and deep cuts to government spending at the end of the year unless the president
and Congress can reach a deal.
That's no easy task for a deadlocked government whose overall
composition has barely changed - a Democratic president and Senate and a
Republican House.
If Congress and
the White House don't reach a deal, the spending cuts and tax increases could
total $800 billion next year. Economists have warned that could be enough to
push the economy back into recession.
"Obama's re-election does not change the bigger economic or
fiscal picture," Paul Ashworth of Capital Economics Ashworth, an economic
research company, said in a note to clients.
Tobias Levkovich, a financial analyst at Citi Research, told
clients Wednesday that a compromise on taxes and spending was likely in mid- to
late January, but that stocks will probably fall in the meantime.
A deal early next year is much more
likely "once the political class begins to negotiate realistically and as the
consequences . . . are too costly for either party to ignore," he wrote.
Just after 10:15 a.m. EST, the Dow was
down 240 points at 13,003. The S&P was down 26 points at 1,401. The Nasdaq
composite index was off 57 points at 2,954.
As traders streamed into lower-risk investments, the yield on
the 10-year Treasury note plunged to 1.64 percent from 1.75 percent late
Tuesday. A bond's yield declines as demand for it increases.
Broad industries reacted to the
election much as analysts had expected.
Hospital companies soared because of expectations that they
will gain business under the health care law, known as ObamaCare. HCA Holdings
and Community Health Systems each leapt 6 percent, and Universal Health Services
and Tenet Healthcare 5 percent.
With Obama seeking to restrain the growth of military
spending, defense companies could struggle to win government contracts. Their
stocks fell sharply: Lockheed Martin Lost 3 percent, Northrop Grumman 3 percent
and General Dynamics 3 percent.
Among the 10 industry groups in the S&P 500 index,
financial stocks and energy companies fell the most.
Banks figure to face tougher regulation in a second Obama
term than they would have under Romney. JPMorgan Chase fell 3 percent, Citigroup
3 percent, Bank of America 4 percent and Goldman Sachs Group 4 percent.
The biggest losers were coal
companies, which had hoped that a Romney administration would loosen mine safety
and pollution rules that make it more costly for them to operate. Peabody Energy
dived 7 percent, Consol Energy 4 percent, Alpha Natural Resources 9 percent and
Arch Coal 10 percent.
Oil companies
fell less steeply.
Alternative
energy companies, especially solar manufacturers, rose on expectations that they
will continue to enjoy generous subsidies. First Solar and Yingli Green Energy
Holding each rose 2 percent.
