Election over, US stocks dip on challenges to come

The election behind them, U.S. investors dumped stocks Wednesday and turned their focus to a world of problems — economically harmful tax increases and spending cuts at home and a deepening recession in Europe.

The Dow Jones industrial average plunged as much as 245 points in the first hour of trading, and the Standard & Poor's 500 index fell as much as 27, or 1.6 percent. Energy companies and bank stocks took big losses.

Stocks seen as benefiting from President Barack Obama's decisive re-election rose. They included hospitals, free of the threat that a President Mitt Romney would have sought to roll back Obama's health care law, and renewable-energy companies.

With the campaign resolved, traders' attention returned to an increasingly ill European economy, dragged down by a debt crisis for more than three years. The 27-country European Union said unemployment there could remain high for years.

The European Commission, the executive arm of the EU, said that 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.

The EU also predicted a larger decline for the 17 nations that use the euro currency: 0.4 percent this year, slightly worse than a previous estimate of a 0.3 percent decline.

Mario Draghi, president of the European Central Bank, also warned that economic powerhouse Germany is no longer insulated from the region's troubles.

In the U.S., stock futures were higher overnight, after Obama cruised to victory. They turned sharply lower after the European forecasts.

Obama's win came after 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 U.S. economy.

As those concerns subsided, traders 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 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.

If Congress and the White House don't reach a deal, the spending cuts and tax increases could total $800 billion next year. Economists have warned that could be enough to 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.

Tobias Levkovich, a financial analyst at Citi Research, told clients Wednesday that a compromise on taxes and spending was likely in mid- to late January, but that stocks will probably fall in the meantime.

A deal early next year is much more likely "once the political class begins to negotiate realistically and as the consequences . . . are too costly for either party to ignore," he wrote.

Just after 10:15 a.m. EST, the Dow was down 240 points at 13,003. The S&P was down 26 points at 1,401. The Nasdaq composite index was off 57 points at 2,954.

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.

Broad industries reacted to the election much as analysts had expected.