Markets Greet Obama With Historic Sell-0ff

Wall Street gave president-elect Barack Obama a rude welcome with an historic sell-off that saw the Dow Jones Industrial Average plummet by 7.1 percent following Election Day. This represented the largest post-presidential election decline in the modern era. 

Since 1900, the worst such three-day performance for the Dow was a 6.0 percent fall after Harry S Truman was reelected in 1948. Such titanic declines are atypical as markets normally rally immediately after presidential elections with the average since the beginning of the 20th century being a 0.7 percent rise.

Welcome to the White House, Mr. Obama. 

To be sure, with the market's volatility of late, as well as the state of the economy, there certainly can be a number of explanations for this historic collapse. However, given the magnitude of the decline Wednesday and Thursday – the Dow lost almost ten percent in two days only to recover some Friday – there's no question this represented Wall Street's vote of no confidence in Obama's economic plans for the future. 

In particular, the markets clearly believe Obama will seek to raise taxes on long-term capital gains shortly after Inauguration Day. This acts to put pressure on stocks before the end of the year as people who still have gains will look to sell before December 31 in order to take advantage of the current laws. 

Investors also think any increase in the current capital gains tax-rate will negatively impact stock returns for years to come, as every time such rates were reduced in the past three decades equities fared very well. 

Yet, it's not just higher capital gains taxes Wall Street is worried about, for despite Obama's campaign promises to cut income taxes on 95 percent of workers while raising them only for folks making over $250,000 a year, few involved in the markets believe him. 

After all, the fiscal 2009 budget deficit is quite daunting to say the least. Under the original projections of unified revenues (including Social Security and Medicare) of $2.7 trillion, and unified expenditures of $3.1 trillion, the Gross Domestic Product was expected to grow by 2.2 percent and unemployment to be 5.6 percent. 

You can toss that latter assumption out the window, as it was reported Friday that unemployment in October climbed to 6.5 percent which is destined to go much higher in the coming months likely stopping in the eights if we're lucky. And, as the recession has certainly started, 2.2 percent GDP growth in FY '09 seems highly-doubtful. 

As such, $2.7 trillion in tax receipts might be a very aggressive forecast. Maybe more important, $3.1 trillion in projected expenditures doesn't include the $700 billion (and counting!) allocated to bailing out failed financial institutions. 

This means that for the first time since World War II, America will spend at least 40 percent more than it collects creating a budget deficit almost guaranteed to be in excess of $1 trillion, possibly as high as $1.5 trillion.

With this in mind, the talk coming from Democrats like House Financial Services Committee Chairman Barney Frank that tax hikes on the wealthiest Americans may have to be postponed next year due to the recession seems destined to be a lot of pre-election hooey, as does Obama's claim that only those making above $250k will be targeted. 

On the flipside, Obama has promised low income voters who don't currently pay federal taxes that they're going to get checks to offset their property and state taxes...and that's a promise Obama is likely to keep. 

Add it all up, and higher income taxes, higher capital gains taxes, and an exploding budget deficit don't portend good things for the economy or stocks. 

If only folks would have realized this before Election Day.

Noel Sheppard is associate editor of the Media Research Center's NewsBusters.org.