CNBC Executive News Editor
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.
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 agian
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 to 1.63 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.
Comment: You really do not understand what you have done. All the smart, intelligent folks, many of whom I read on FB, quick with the "put down", the snide remarks, the holier than thou language, you have displaced your unwillingness to go outside your personal sphere of influence with an almost financial/social-political naivete' beyond belief. This is only magnified by your inability to go outside yourselves and look back in to see what is the truth. It is much easier to be part of a group think rather then have the courage to ask critical questions. While behaving in this manner you have the audacity to tell us how demeaning we are, how uncaring for others we are because of course you have THE answer. The most closed minded people I know are the ones who profess to be so transparent and open to ideas; right, as long as they are congruent with yours. You don't wonder at all why we stand firm with what we value. BTW, not a good "new beginning" by the President to open his arms to embrace other ideas.
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