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Stocks plunge after election; European woes deepen

The election behind them, U.S. investors dumped stocks Wednesday and turned their focus to a world of problems – tax increases and spending cuts that could stall the country’s economic recovery and a deepening recession in Europe.

The Dow Jones industrial average plummeted as much as 369 points, or 2.8 percent, in the first two hours of trading. The average was on track for its worst decline in a year.

The Standard & Poor’s 500 index fell as much as 40 points, or 2.8 percent.

Energy companies and bank stocks took some of the biggest losses. Both industries presumably would have faced lighter and less costly regulation if Mitt Romney had won the election.

“It does look ugly,” said Robert Pavlik , chief market strategist at Banyan Partners LLC. He said it’s hard to untangle Europe-related selling from nerves about the nation’s fiscal policy.

“It’s a combination of all that, quite honestly,” Pavlik said.

Stocks seen as benefiting from President Obama’s decisive win rose. They included hospitals, free of the threat that a Romney administration would have sought to roll back Obama’s health care law, and renewable-energy companies.

With the election over, traders’ attention returned to an increasingly sickly European economy, dragged down by a debt crisis for more than three years. The 27-country European Union said unemployment there could remain high for years.

The European Commission, the executive arm of the EU, said that it expects the region’s economic output to shrink 0.3 percent this year. In the spring, the group predicted no change.

For next year, the commission predicted 0.4 percent growth, barely above recession territory. It predicted 1.3 percent last spring.

U.S. stock futures were higher overnight after Obama cruised to victory. They turned sharply lower after the European forecasts and discouraging comments from Mario Draghi, president of the European Central Bank. European markets turned negative as well.

Now that the U.S. election has been resolved, it’s natural for traders to focus on Europe’s problems, said Peter Tchir, who manages the hedge fund TF Market Advisors.

What they’re tuning in to, he said, is the failure of a major European summit last week and minimal progress on the issues that are holding the region back.

“People can only digest one or two stories at a time, and people had put Europe on the back burner” before the election, he said.

Obama’s win followed a costly campaign that blanketed markets with uncertainty about possible changes to tax rates, government spending and other issues seen as crucial to the prospects of some industries and the broader economy.

As jitters about the election subsided, traders confronted an ugly reality -- the so-called fiscal cliff, which will impose automatic tax increases and deep cuts to government spending at the end of the year unless the president and Congress can reach a deal.

That’s no easy task for a deadlocked government whose overall composition has barely changed – a Democratic president and Senate and a Republican House.

If Congress and the White House don’t reach a deal, the spending cuts and tax increases could total $800 billion next year. Some economists say that could push the economy back into recession.

“Obama’s re-election does not change the bigger economic or fiscal picture,” Paul Ashworth of Capital Economics Ashworth, an economic research company, said in a note to clients.

Fitch Ratings offered a warning about the fiscal perils facing the U.S. If Obama does not quickly forge agreement with Congress to avert the fiscal cliff, the credit rating agency said Wednesday, it may strip the U.S. of its perfect AAA credit rating.

Fitch changed the outlook for the U.S. rating to negative last year after Congress and the Obama administration failed to meet an earlier deadline for resolving their differences on fiscal policy. Other rating agencies also have warned of possible downgrades.

Shortly before 12:30 p.m. Fort Wayne time, the Dow was down 296 points at 12,949, dipping below 13,000 for the first time since Sept. 4. The S&P 500 was down 31 at 1,397. The Nasdaq composite index dropped 68 to 2,943.

European markets closed sharply lower, with benchmark indexes in France and Germany losing 2 percent. Italy lost 2.5 percent; Spain lost 2.3 percent. Associated Press business writers Steve Rothwell in New York, Tom Murphy in Indianapolis and Linda Johnson in Trenton, N.J., contributed to this report.

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