Fiscal Cliff Fears Drag US Stocks Sharply Lower

U.S. stocks plunged Wednesday, just hours after President Obama handily won reelection to a second four-year term, as investor fears of the so-called fiscal cliff helped spark a sell-off.

In early afternoon trading, the S&P 500 was down 31.13 points, or 2.18 percent, to 1,397.26, while the Nasdaq Composite fell 68.18, or 2.26 percent, to 2,943.75. The blue chip Dow Jones Industrial Index gave up 295.14 points, or 2.23 percent, to 12,950.54.

Paul Ashworth, chief U.S. economist for Capital Economics, said that investor concern about the fiscal cliff, a term that designates spending cuts and tax hikes set to begin early next year, is overwhelmingly focused on the tax hike portion of the cliff.

"Overall we're talking about a contraction of about $600 billion, but $500 billion of that is in tax increases," Ashworth said, referring to the end of the Bush-era tax reductions and the end of the payroll tax cut.

At the same time, he said, the day's equity declines could reflect other factors.

"It's difficult to say (why else stocks are dropping). We saw equity markets open up in Asia and then open higher in Europe. But around midday in Europe the markets started turning down. It seems like the U.S. market took its lead from Europe. Besides the fiscal cliff, it could be the European Commission's downbeat forecast on European growth and also the vote later today in Greece on more austerity, a crucial vote that takes place against a backdrop of a national strike."

Among U.S. equities, coal stocks were some of the poorest performers.

In early afternoon trading, James River Coal Company (Nasdaq:JRCC) plummeted 21 percent, and shares of Arch Coal Inc. (NYSE:ACI) dropped more than 12 percent. Alpha Natural Resources, Inc. (NYSE:ANR) lost 10.5 percent.

Analysts said the president's reelection may signal more environment regulations for coal miners, which dims Wall Street's perception of such shares.

"(The coal stocks' drop is) 100 percent related to election results," Eric Green, senior managing partner at Penn Capital Management, told Reuters.

Financial stocks were also hit hard. Bank of America Corp. (NYSE:BAC) declined 5.5 percent, while JPMorgan Chase & Co. (NYSE:JPM) fell 4.5 percent and Morgan Stanley (NYSE:MS) lost 6.76 percent. Citigroup Inc. (NYSE:C) was down 4.57 percent.

Earlier Wednesday, the Keefe Bruyette & Woods Index, which tracks major bank stocks, was down 2.2 percent, according to the Wall Street Journal.

"There was hope that a Romney White House, along with a still Republican House, and perhaps a divided Senate would repeal burdensome aspects of legacy Obama/Pelosi actions that increased capital charges, reduced important fee income, raised compliance expenses and threatened other revenue aspects of the bulge model," David Trone, JMP Securities analyst, told the Wall Street Journal.

Besides bad news for coal and bank stocks, Obama's reelection comes against a broadly negative assessment of the U.S. economy.

The fact that Obama will have another four years "does not change the bigger economic or fiscal picture," Ashworth said in a note. "Over the next couple of years the U.S. economy will remain saddled with an uncomfortably high unemployment rate and will struggle to grow by more than 2 percent a year."

While stocks were falling, the yield on the 10-year Treasury fell 5.5 percent to 1.65 percent.