Obama re-election torpedoes market, sees year's biggest slump

New York: What did you expect? It was no secret that the markets were rooting for Republican Mitt Romney to win the White House. But following the re-election of President Barack Obama, the markets experienced their biggest sell-off of the year on Wednesday.

The Dow Jones Industrial Average dropped 312.95 points, or 2.4 percent to close at 12,932.73. That handed the blue-chip average its biggest one-day fall since 9 November 2011. Stocks tumbled to their biggest one-day loss in a year amid post-election worries about the coming fiscal fight in Congress.

You might think our Indian government takes the cake when it comes to policy paralysis, but the US Congress also has a penchant for getting stuck in astounding policy gridlock.

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The last time the US Congress failed to come to a bipartisan agreement on raising the debt limit in August 2011, it endangered America’s credit rating. After the bitter fight in Congress over raising the debt limit in the summer of 2011, Standard & Poor’s downgraded the US government’s credit rating to AA+ from AAA.

[caption id=“attachment_518643” align=“alignleft” width=“380”]  Agony on the trading floor. Reuters[/caption]

Despite being the most expensive presidential contest in history with at least $3 billion being lavished on attack ads, very little has changed in Congress after the elections. Obama remains president. The Republicans remain in control of the House of Representatives. The Democrats hold onto the Senate. In short, it’s a recipe for not getting things done.

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Obama has been unable to make any headway with Republicans in addressing the fiscal cliff, at least to date, and the looming deadline is spooking the financial markets. There is palpable concern about the “fiscal cliff,” scheduled tax increases and spending cuts set to take place on 1 January unless Congress reaches a compromise to avert the policy changes.

“The split houses of Congress, and continued partisan rancor, have fueled worries that legislators may not reach a compromise until the last minute, if at all,” warned The Wall Street Journal.

America’s bitterly divided Congress has to move swiftly to reach a deal on about $600 billion in government spending cuts and higher taxes which are otherwise set to kick in from January. Economists have warned that if the Bush-era tax cuts expire, it could push the US economy back into recession.

Fitch Ratings said that there would be “no fiscal honeymoon” for Obama, warning on Wednesday that the US probably would lose its AAA credit rating if the White House and Congress don’t address looming tax increases, spending cuts and the fast-approaching debt ceiling.

“Failure to avoid the fiscal cliff and raise the debt ceiling in a timely manner, as well as securing agreement on credible deficit reduction, would likely result in a rating downgrade in 2013,” Fitch said.

Obama and members of Congress have pledged to try to agree on a broad deficit-reduction plan to avoid the impact of the fiscal cliff, and such a deal most likely would include an increase in the debt limit.

But Tuesday’s election sent mixed messages from the American electorate. Obama was re-elected on a platform of higher taxes for wealthy Americans. On the other hand, Republicans retained the majority in the House, running on a pledge of no tax increases.

Americans are now hoping that a second-term Obama will manoeuvre toward the centre, seeking compromise with Republicans on major issues as did his Democratic predecessor, former President Bill Clinton. They are hoping he might rethink his call for raising taxes on wealthier Americans to pay for deficit reduction and come to a compromise with the opposition on tackling the fiscal cliff in the interest of getting things done for the American people.