Signs that the economy is rapidly deteriorating put an end to celebrating over the presidential election in the stock market Wednesday, sending the Dow Jones Industrial Average plunging nearly 500 points.
News that the economy’s vast service sector fell deeply into recession territory last month, while as many as 200,000 jobs likely were lost, renewed fears among investors of a prolonged and nasty downturn.
The Dow and other major indexes all fell more than 5 percent, with the Dow landing down 486 points at 9,139. The marketwide drop was the largest to follow any presidential election in the United States, following a nearly 300-point gain in the Dow on Tuesday that was the largest-ever gain on an election day.
Stocks fell initially as investors cashed in gains after a six-day run that lifted the Standard & Poor’s 500 index more than 18 percent. But the selling picked up momentum as the market worried anew about the weakness of the economy and pondered what an Obama administration might do.
“We had an election yesterday; that doesn’t mean the problems go away,” said Kevin Rendino, a Plainsboro, N.J.-based money manager at BlackRock Inc. “We still have an economic slowdown.”
“What is happening in the market is a continuation of really the last few weeks,” said Subodh Kumar, global investment strategist at Subodh Kumar & Associates in Toronto. “The markets are still incorporating the slowdown in the global economy.”
“I would put what we’re seeing today not so much as disappointment about policy from the incoming administration and more about continuing to incorporate assessments about how weak economies are,” he said.
Investors were growing uneasy in advance of the Labor Department’s October employment report, to be issued on Friday. Economists on average expect a 200,000 drop in payrolls, according to Thomson/IFR.
Foreshadowing Friday’s job news, a report by ADP Employer Services showed companies cut jobs by 157,000 in October, the most since November 2002. Employers have been slashing jobs after a freeze-up in the credit markets crippled many companies’ ability to get financing.
The market also was spooked by a report from the Institute for Supply Management showing the services sector fell into recession last month. Most Americans are employed in services, and many companies are being forced to the edge of bankruptcy and are rapidly shedding jobs.
Speculation also grew on Wall Street about the effects of a Barack Obama presidency on the financial markets and economy.
Mr. Obama will inherit an enormous budget deficit as large as $1 trillion when he is sworn in Jan. 20, giving him limited room to respond to the downturn in the economy.
Analysts said that the market also is anxious about whom Mr. Obama selects as the next Treasury secretary, as well as whom he picks for other Cabinet positions.
“A lot of the policy going forward is going to have an effect on the various sectors of the market,” said Joe Keetle, senior wealth manager for Dawson Wealth Management.
Mr. Obama’s victory means that industries such as oil and gas producers, utilities and pharmaceuticals may face greater regulation and even taxes, while labor unions and automakers are expected to benefit.
In addition, banks, insurance companies, hedge funds and the rest of the financial sector will almost certainly face a regulatory overhaul by the Democratic Congress next year.
Wednesday’s trading showed that the market is living up to expectations of continued volatility as it tries to recover from the devastating losses of the last two months.
Bill Stone, chief investment strategist at PNC Wealth Management, said the uncertainty over the direction the government’s financial bailout plan will take under the next administration likely weighed on financial stocks Wednesday.
Analysts agree that Mr. Obama’s most immediate priority will be dealing with the nation’s financial crisis and deciding how to further implement the $700 billion rescue package passed by Congress last month.
He is expected to move quickly to get a team in place to work with outgoing Treasury Secretary Henry M. Paulson Jr.
“You’ve got to believe that the Obama camp knows you have to have a smooth transition,” Mr. Stone said.
c This article is based in part on wire service reports.