Dow Sinks Day After Election; Obama to Inherit Bad Economy

The new president will be left with an economy like no other in modern history.

ByABC News
November 3, 2008, 6:28 PM

Nov. 5, 2008 — -- The stock market took a major beating today after the election of Democrat Barack Obama and Democratic gains in both the House and Senate. The Dow Jones industrial average losing almost 500 points and markets in Europe also saw drops.

Initially, stocks fell as investors cashed in from a week-long rise in share prices. But then in the afternoon the sell-off gained speed as traders started to question exactly what an Obama presidency would mean for American businesses.

Investors also shifted their focus back to the economy in anticipation of Friday's job report where the government is expected to announce roughly 200,000 in lost jobs in October.

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With the closely watched presidential election over, the business world is now bracing itself for the new reality of a Democratic-controlled Washington. That likely means stronger oversight and regulation of the financial sector, a tax structure that is less friendly to companies, increased spending on entitlement programs and more labor-friendly policies.

The Dow started the day down about 100 points, fell 200 points by noon and ended the day down about 490 points or 5.3 percent. The Nasdaq lost 5.6 percent and the S&P 500 lost 5.3 percent.

In Europe, Great Britain's FTSE 100 fell 2.3 percent, the German DAX lost 2.1 percent and France's main index was down 2 percent. Asian markets were up 2 percent to 4 percent, following a strong rally on Wall Street Tuesday.

The Dow had ended Election Day up 305 points, or 3.3 percent. It was the best showing for the market on an Election Day ever. The previous record was a 1.2 percent gain in 1984 when Ronald Reagan beat Walter Mondale. Before 1980, the market was closed on Election Day.

Talk on Wall Street switched this morning from who would win the election to how will Obama shape his administration. Investors are closely watching who the president-elect will pick as his treasury secretary.

The likely candidates include former Treasury Secretary Lawrence Summers; Tim Geithner, the president of the New York Federal Reserve; and a distant third possible pick of former Federal Reserve System chairman Paul Volcker. New Jersey Gov. Jon Corzine's name has also been floated as a possible pick.

The former Goldman Sachs CEO said on CNBC this morning, "I'm never going to say never to anything. I like what I'm doing. I have not had any conversations with anybody about this job."

The Worse Crisis Since the Great Depression

Today's market woes just shows a little of what President-elect Barack Obama will face: the worst economic crisis the country has experienced since the Great Depression of the 1930s.

What began with the explosion of the housing bubble has unfolded into a far-reaching global financial crisis affecting everything from banks to retail sales to the auto industry. Consumer confidence is hovering at record lows and consumer spending has declined for the first time in 17 years as Americans prepare to ride out what economists think could be the most severe recession in decades.

The first order of business for the new president will be to stabilize the economic crisis.

Plan for Homeowners?

Helping distressed homeowners will be a priority for Obama when he enters the White House.

"Just over 1 million households will lose their homes this year in foreclosure," said Mark Zandi, chief economist of Moody's

With one in six U.S. homeowners now "underwater" on their homes -- owing their mortgage lender more than what their home is worth -- this wave of foreclosures is likely to continue, economists say.

Obama laid out a rescue plan for the housing crisis. Obama proposed a 90-day moratorium on home foreclosures, which would give some homeowners a chance to catch up on missed payments and give the government a chance to develop a systematic plan for rewriting the terms of unaffordable mortgages for qualified homeowners.

Obama also wants to empower bankruptcy judges to lower mortgage payments to keep people in their homes, something the mortgage industry opposes.

Help for the Jobless?

Rising unemployment is another challenge for President-elect Obama. As consumers slow their spending, businesses are being forced to lay off growing numbers of workers. Some economists expect the next jobs report, due out Friday, to show that as many as 200,000 Americans were cut from company payrolls in October.

Obama has pledged to extend unemployment benefits and eliminate taxes on those benefits. He supports allowing more leniency on hardship withdrawals from 401(k) and IRA savings accounts, by temporarily lowering or suspending the tax penalties on withdrawals.