Share prices on Wall Street had plummeted on Wednesday amid renewed recession fears, underlining the economic challenges Barack Obama faces as the next US president.
Volatility returned to the market and the Dow Jones industrials fell by more than five per cent.
The market had been expected to give back some gains after a six-day winning streak, but the fall was more pronounced than expected as investors lost their recent confidence about the economy and began dumping stocks again, with light volume exaggerating the price swings.
“The market has really gotten ahead of itself, and falsely priced in that this recession wasn’t going to be as prolonged as thought,” said Ryan Larson, head of equity trading at Voyageur Asset Management.
“We’re in a really bad recession, period,” he said. “Wall Street can spin it anyway they want to, but this is likely going to be more prolonged than people anticipated. People are locking in profits and realising we’re not out of the woods.”
Analysts said the market was also growing uneasy ahead of the labour department’s October employment report, to be released on Friday, that is expected to indicate growing unemployment.
Beyond broad economic concerns, worries about the financial sector intensified after Goldman Sachs began to notify about 3,200 employees globally that they had lost their jobs as part of a broader plan announced last month to slash 10 per cent of the investment bank’s work force.
The Dow fell 486.01, or 5.05 per cent, to 9,139.27 while the Standard & Poor’s 500 – the broad index most closely watched by market professionals – fell 52.98, or 5.27 per cent, to 952.77.
The S&P had risen more than 18 per cent through the six sessions that ended on Tuesday.
The tech-heavy Nasdaq composite index fell 98.48, or 5.53 per cent, to 1,681.64.
Although the market expected Obama to win the election, analysts said the market was already anxious about who Obama would select as the next treasury secretary and for other cabinet positions.
“The celebration is over. Today we saw a bit of reality,” said Al Goldman, chief market strategist at Wachovia Securities in St Louis.
“The celebration is over. Today we saw a bit of reality … Obama is coming into a situation with limited experience, having to handle an economy in serious trouble”
Al Goldman, chief market strategist at Wachovia Securities in St Louis
“President-elect Obama is coming into a situation with limited experience, having to handle an economy in serious trouble, a couple of wars and terrorism. It’s an extremely tough job.”
Analysts agree that Obama’s most immediate priority will be dealing with the nation’s financial crisis and deciding how to further implement the $700bn rescue package passed by congress last month.
Goldman said trading could remain turbulent as investors begin assessing the shape and direction of Obama’s forthcoming economic policies.
“The market has to go through a period of figuring out if they are going to gain confidence in Obama and the congress or lose it,” he said, adding that investors will be paying close attention to who will be appointed to top economic posts.
But Max Fraad Wolff, an economics professor at the New School University in New York, told Al Jazeera that the market movements and Obama’s election victory had “very little to do with each other”.
“I’m not sure either of them, like the major economic issues that now face the US and the world, have a whole lot to do with exactly who is the president-elect of the US,” he said.
Obama’s victory, however, may mean industries such as oil and gas producers, utilities and pharmaceuticals facing greater regulation and even taxes, while labour unions and car manufacturers are expected to benefit.
In addition, banks, insurance companies, hedge funds and the rest of the financial sector will almost certainly face attempts at a regulatory overhaul by the Democratic congress next year.
Other sectors that are being closely watched in light of the election results are pharmaceuticals and alternative energy, analysts said.
In addition to monitoring the direction the next administration will take, investors continue to heed the state of the credit markets.
The paralysis in the credit markets that began after the bankruptcy of Lehman Brothers in mid-September has been alleviated somewhat by a series of government interventions, but they still show some signs of strain.
Banks continued to reduce the rates they charge one another for borrowing on Wednesday, but the key interbank lending rate – the London Interbank Offered Rate, or Libor – remains well above the US Federal Reserve’s target interest rate of one per cent.
Libor for three-month dollar loans fell to 2.51 per cent from 2.71 per cent on Tuesday.