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Why Stocks Had a Terrible Week

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This week started out with such hope.

Analysts and commentators had almost universally predicted that the stock market would rally following the presidential election, regardless of who won. Yet, when given the chance to do so, the market proceeded to have two consecutive days of significant declines.

On Wednesday, the day after the election, the Dow Jones Industrial Average (INDEX: ^DJI  ) plummeted by nearly 300 points. Then, on Thursday, it fell an additional 120.

What happened?
In the first case, as my colleague Morgan Housel pointed out, there's simply no way to predict how the market is going to perform following an election. "History makes one thing clear," says Morgan, "there is little correlation between elections and stock performance -- particularly in the short-run."

In the second case, despite premonitions to the contrary, it did matter who won. Wall Street had lined up firmly behind Mitt Romney. So much so, in fact, that his corporate donors list read like a Who's Who list of Wall Street financial firms. At the top were Goldman Sachs (NYSE: GS  ) , Bank of America (NYSE: BAC  ) , JPMorgan Chase (NYSE: JPM  ) , and Wells Fargo (NYSE: WFC  ) , among others.

Perhaps not surprisingly, in turn, the hardest hit stocks following the President's reelection were these very same institutions. To highlight only the worst performers, Bank of America fell by more than 7% and JPMorgan by more than 5.5%.

Finally, all eyes are now fixated on the fiscal cliff, the series of draconian tax increases and spending cuts that will go into effect this January in the absence of Congressional action. According to a market strategist that I quoted yesterday:

It's all about the fiscal cliff. The longer this uncertainty goes on, the more it will weigh on economic activity and investment decision-making. It's just going to have a chilling effect.

Ending on a high note
Fortunately for investors, the market nevertheless ended the week on a more positive note, closing out today higher by four points, or 0.03%. The market was up early by a healthy margin after a report from the University of Michigan revealed that consumer confidence rose to a more than five-year high in November. It then receded, however, after the Democrats and Republicans publicly retrenched on issues related to taxes and spending. Such is life nowadays.

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