In the wake of Tuesday’s re-election of President Obama, the Dow Jones Industrial Average fell 434 points in two days, a drop of 3.3%.
That’s better than when he was first elected. After a 305-point rally on Election Day 2008, the DJIA fell 486 points, or more than 5%, on the day after, which was the largest post-election drop ever.
In 2008, the housing bubble had burst and we were dealing with the biggest financial crisis since The Great Depression. Today, we still have not recovered from the financial crisis, but face a “fiscal cliff” and continuing troubles in Europe.
The fiscal cliff, which combines $800 billion in tax increases and government spending cuts, has investors spooked for many reasons. Unless action is taken:
- Corporate dividends will be taxed like earned income, increasing the tax from 15% to a top rate of 39.6%.
- The Affordable Care Act adds a 3.8% on investments, so the tax on dividends could nearly triple overnight.
- The top tax rate on capital gains will increase from 15% to 20%.
- Income taxes and estate taxes would also increase, and many more Americans would be subject to the alternative minimum tax (AMT).
- The re-election of President Obama, who favors tax increases, makes it more likely that the increases will take place.
- With Republicans controlling the House and Democrats controlling the Senate, Congress is divided and it will be difficult to reach an agreement that would avoid or reduce the impact of the fiscal cliff.
Of course, there’s plenty of time between now and the end of the year to deal with the issue. But Congress will be on holiday for much of the time between now and the end of the year.
Meanwhile, in Europe
While Europe’s sovereign debt crisis received little attention during the busy election season, it’s not because the crisis has abated.
Once again, Greece is the little country that can’t, as it increasingly appears that “the Greek ‘austerity’ vote was merely theater,” as Zerohedge put it. The resulting news in Europe this week is that European finance ministers may delay approval of the next bailout payment for Greece from November 16 to late November, when they will hear a full report on Greece’s compliance (or lack thereof) with the terms of the bailout.
The unveiling of the Outright Monetary Transactions (OMT) program in September by the European Central Bank (ECB) boosted market confidence that Europe was doing something about its problems. But, like America’s ongoing quantitative easing, Europe’s OMT won’t eliminate economic problems. Lower interest rates just make it less expensive to keep borrowing more and more money.
Maybe that’s why economic confidence in Europe has sunk to a three-year low.
So the economic misery continues, but at least we won’t have to see or hear any more election ads.