-- Investors got a post-election reality check Wednesday as focus shifted from which states are red or blue to the sad state of the economy.
The Dow Jones industrials sank 486 points, or 5.1%, more than erasing Tuesday's 305-point Election Day gain as investors mulled over ominous economic data. Showing just how severe the pullback was, one of the stock market's broadest gauges, the DJ Wilshire 5000 index, fell 5.2% Wednesday, its worst post-election day in at least 28 years.
No longer distracted by the presidential race, investors are left to worry about bigger issues facing the economy and corporate earnings, says Jack Ablin of Harris Private Bank. "Beyond the scope of an Obama administration, you have an economy that's uncertain and slowing," he says.
Given the broad market's 18% rally in the previous six trading sessions after steep declines during October, analysts were not completely surprised by the market's sharp pullback. Still, investors had plenty of things to worry about as they sorted through the post-election flurry of news, including:
•More downbeat economic news. The Institute for Supply Management's services sector index fell to a worse-than-expected 44.4 in October. A reading below 50 means activity is shrinking.
And the ADP National Employment report revealed U.S. companies cut an estimated 157,000 jobs during October. Last month's drop was the largest in nearly six years, and was far greater than the predicted decline of 102,000 jobs.
•New uncertainties. While the next president now is known, Barack Obama's victory raises new questions, says Quincy Krosby of The Hartford. A big one is who Obama will choose to succeed Treasury Secretary Henry Paulson in a position that has become key to getting the U.S. through the most serious credit crisis since the 1930s. "Obama's transition team has no luxury of a honeymoon," Krosby says. "The team has to get going immediately."
•Initial Democratic jitters. In looking at historical stock performance from Election Day through year's end, stocks tend to perform worse when a Democrat wins. Going back to 1900, the Dow has lost an average 0.96% in that two-month period, vs. a gain of 4.14% when a Republican candidate is elected, says Bespoke Investment Group.
These factors aren't enough to dim hopes stocks have hit bottom, but it doesn't mean they will soar either, says Hugh Johnson of Johnson Illington Advisors. "It's hard to make the case for a new bull market when the outlook for the economy and earnings is so dismal," he says.