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Why the Dow Crashed Today

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It might be easy to look at today's 312-point drop in the Dow Jones Industrial Average (INDEX: ^DJI  ) and assume it to be a wholesale rejection of President Obama's re-election, but there's more at play here. After all, the Dow gained 1% yesterday, when polls showed Obama was likely to win.

So what's behind today's massive sell-off that also saw the S&P 500 (INDEX: ^GSPC  ) dive 2.4%, the Nasdaq (INDEX: ^IXIC  ) slide 2.5%, oil drop 4.6%, and 10-year Treasury yields fall 6.3%, a sign that investors were rushing into the safety of bonds?

Two major factors: The fiscal cliff has now taken center stage with the election out of the way, and concerns over Europe have surfaced once again. Major indexes in Europe all fell near 2% after European Central Bank President Mario Draghi said he expected continuing weakness in the European economy for the foreseeable future, and that the debt crisis is weighing on the bulwark German economy, by far the eurozone's biggest. Elsewhere on the continent, Greece narrowly approved more austerity measures tonight, despite widespread protests. The vote paves the way for the next round of bailout funds, this time worth $39.5 billion, though another important vote on Sunday for Prime Minister Antonis Samaras's 2013 budget awaits. Markets should respond positively to tonight's Greek vote, as most investors hope to avoid a Greek exit from the euro, which would likely lead to greater turmoil on the continent.

Stateside, concerns about the fiscal cliff are rattling investors. The sequestration promised by Congress if a new plan isn't worked out includes $7 trillion in spending cuts and tax increases over the next 10 years. The measures would go into effect at the start of the new year if nothing's done, but House Speaker John Boehner late today said he would accept revenue increases as part of larger budget deal to avert the fiscal cliff, an important step toward compromise.

Looking at individual stocks, it's no major surprise that the financials were the biggest losers on the Dow as Bank of America (NYSE: BAC  ) lost 7.1% and JPMorgan Chase (NYSE: JPM  ) fell 5.6%. Uncertainty is particularly bad for the big banks, and the turmoil in Europe combined with the fiscal cliff has investors running scared. Fitch Ratings also warned it would downgrade its U.S. credit rating if the government doesn't act soon on the fiscal cliff, a move that could add a further strain on financial markets.

Every stock on the Dow lost at least 0.7% on a day where there were few winners in the entire market. Some sectors, such as for-profit education and coal, took the news of Obama's victory particularly hard, with double-digit losses. Look for news out of Europe and on the fiscal cliff to continue to shape markets in the coming days.

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Read/Post Comments (7) | Recommend This Article (24)

Comments from our Foolish Readers

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  • Report this Comment On November 07, 2012, at 11:55 PM, SpaceVegetable wrote:

    The Dow gained because of the upcoming end of election uncertainty. It crashed because of Obama and nothing more. Expect a continuous down trend as people sell to lock in gains at this years tax rates before Obama's punitive envy taxes kick in next year.

  • Report this Comment On November 08, 2012, at 12:14 AM, Dustin75 wrote:

    Looks like someone needs to learn to read. It was obvious that Obama was going to get reelected, the turn is the so called "fiscal cliff" that everyone hopes to avoid by an obstructionist Republican house.

  • Report this Comment On November 08, 2012, at 12:49 AM, noonecarescool wrote:

    This article is ridiculous. Investors have known of the fiscal cliff issue for a very long.

    To suggest that the DAY after the election they suddenly are focusing on the fiscal cliff and NOT the result of the election is absurd. It is pretty obvious which way the writers politics lean.

    Anyone who says it was obvious who was going to win probably shouldn't invest in stocks because they don't understand the concept of 20/20 hindsight. If people "knew" there would not have been millions glued to their TV's on election night.

  • Report this Comment On November 08, 2012, at 2:01 AM, Philbruskin wrote:

    So next time the govt won't bail u out and then we'll see how Dow jones survives thieves all of them

  • Report this Comment On November 08, 2012, at 3:34 AM, xscharm wrote:

    If I were a Wall Street banker my south end would be clenched really tight upon hearing Elizabeth Warren won in Mass. She's going to rip the ratbags a new one and I believe Warren's win is a major reason the markets tanked Wednesday.

  • Report this Comment On November 08, 2012, at 5:03 AM, Hestheone wrote:

    No, no, no. The market tanked because 1) Obama no longer needs campaign money so some of the free lunch to banks is going bye-bye. 2) See those banks that got dumped? They gave too much money to Mitt this time around. 3) Lockheed, Boeing, et al are dumping employees in the new year. The economy is headed downward. No point in waiting for that bus any longer. Do you really think the market is going to get better anytime soon?

  • Report this Comment On November 08, 2012, at 4:19 PM, rizzodog wrote:

    check the market the last 4 years under Obama, up 76%

    Take you hate and ignorance elsewhere.

    I suggest you haters educate yourselves, this movement has everything to do with Europe, little to do with presidential races. It will correct like it always does before a run. The cliff will be avoided and the market will stabilize if Europe stays the course.

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