NEW YORK (CBSNewYork/AP) - Some jubilation supporters of President Barack Obama may have felt after his re-election Tuesday was doubtless tempered by an apparent free fall on Wall Street.
The Dow was on track for its worst decline in a year Wednesday as investors dumped stocks after Obama won re-election and turned their focus to a world of problems -- a deepening recession in Europe and tax increases and spending cuts that could stall the U.S. economic recovery.
The Dow Jones industrial average plummeted as much as 369 points, or 2.8 percent, in the first two hours of trading. The Standard & Poor's 500 index fell as much as 40 points, or 2.8 percent.
Energy companies and bank stocks took some of the biggest losses. Both industries presumably would have faced lighter, less costly regulation if Republican Mitt Romney had won the election.
"It does look ugly," said Robert Pavlik , chief market strategist at Banyan Partners LLC. He said it's hard to untangle Europe-related selling from nerves about U.S. fiscal policy.
"It's a combination of all that, quite honestly," Pavlik said.
Stocks seen as benefiting from Obama's decisive win rose. They included hospitals, free of the threat that a Romney administration would have sought to roll back Obama's signature health care law, and renewable-energy companies.
Traders' attention returned to an increasingly sickly European economy, dragged down by a debt crisis for more than three years. The 27-country European Union said unemployment could remain high for years.
The European Commission, the executive arm of the EU, said 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.
U.S. stock futures were higher overnight after Obama cruised to victory. They turned sharply lower after the European forecasts and discouraging comments from Mario Draghi, president of the European Central Bank. European markets turned negative as well.
Now that the election has been resolved, it's natural for traders to focus on Europe's problems, said Peter Tchir, who manages the hedge fund TF Market Advisors.
"People can only digest one or two stories at a time, and people had put Europe on the back burner," he said.
Obama's win followed 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 broader economy.
Traders on Wednesday 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, totaling about $800 million next year alone, 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.
Some economists say the lack of a deal could 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.
Fitch Ratings warned that if Obama does not quickly forge agreement with Congress to avert the fiscal cliff, the credit rating agency may strip the U.S. of its perfect AAA credit rating.
Fitch changed the outlook for the U.S. rating to negative last year after Congress and the Obama administration failed to meet an earlier deadline for resolving their differences on fiscal policy. Other rating agencies also have warned of possible downgrades.
European markets closed sharply lower, with benchmark indexes in France and Germany losing 2 percent. Italy lost 2.5 percent; Spain lost 2.3 percent.
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.
Earnings have been relatively weak, with many companies reporting lower revenue and darkening expectations for the coming quarters.
With more than four-fifths of them having reported, companies in the S&P 500 index say earnings are up about 2 percent over last year, the lowest growth rate in three years, according to data from S&P Capital IQ.
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 5 percent, Northrop Grumman 6 percent and General Dynamics 5 percent.
Banks figure to face tougher regulation in a second Obama term than they would have under Romney. JPMorgan Chase and Citigroup fell 4 percent, Bank of America and Goldman Sachs 6 percent and Morgan Stanley 8 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 9 percent, Consol Energy 7 percent, Alpha Natural Resources 13 percent and Arch Coal 11 percent.
Oil companies fell less steeply.
Alternative energy companies, especially solar manufacturers, outperformed the indexes on expectations that they will continue to enjoy generous subsidies. First Solar was roughly flat and Yingli Green Energy Holding edged slightly higher.
Other notable moves included Apple, the world's most valuable company. It fell 3 percent to $564.57 and has dropped 20 percent from its all-time high of $705.07, reached Sept. 21.
(TM and © Copyright 2012 CBS Radio Inc. and its relevant subsidiaries. CBS RADIO and EYE Logo TM and Copyright 2012 CBS Broadcasting Inc. Used under license. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. The Associated Press contributed to this report.)
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