Investors retreat after Obama's victory gives way to focus on the weak economy.
NEW YORK (CNNMoney.com) -- Stocks slumped near midday Wednesday as the forward-looking market moved beyond Barack Obama's historic victory to the weak economy he inherits.
Oil and gold prices slipped. The dollar fell versus other major currencies and Treasury bond prices rose, lowering the corresponding yields. Lending rates improved, as the credit market continued its thaw.
The Dow Jones industrial average (INDU), the Standard & Poor's 500 (SPX) index and the Nasdaq composite (COMP) all lost around 2% nearly two hours into the session.
Stocks surged Tuesday as investors breathed a sigh of relief that the election was underway. But there was no follow-up Wednesday morning because the result was no surprise, said Steven Goldman, market strategist at Weeden & Co.
"Markets move on what is not expected and everybody was expecting this," he said.
Barack Obama was expected to win his hard-fought battle against John McCain, based on polls leading up to the election. But Wall Street and Main Street had not anticipated by how wide a margin he would win, taking both the electoral college and the popular vote. (Full story)
Many on Wall Street were also hoping that the Democratic-controlled Congress would not earn a filibuster-proof 60 seats, Goldman said. At present, that does not look to be the case. However, results are still trickling in. (Full story)
But on Wednesday the focus returned to the battered economy Obama must shepherd. Two weak labor market reports underscored that weakness and unnerved investors ahead of Friday's big monthly jobs report. (Full story).
Retreat after rally: With the recession in mind, investors opted to step back after propelling stocks, as represented by the S&P 500, more than 18% higher in just over a week.
Despite Wednesday morning's retreat, stocks are likely to see a continuation of that rally for at least a few more weeks, said Weeden's Goldman, as Wall Street recovers some of what it lost this fall. Between Lehman Brothers filing for bankruptcy on Sept. 15th and last week's lows, the S&P 500 lost 32% as investors "anticipated the recession."
Stocks aren't primed to recover those losses in entirety, but should be able to recover a bit more beyond the 18% already regained, Goldman said.
"We were probably the most oversold we had been since October 1974," Goldman said. By looking at other recent bear market bottoms, including the period in 2002-2003, he estimates that the current advance has a little more room to go.
However, as in previous market bottoms, stocks could end up "retesting" those lows over a period of several months, before really moving forward.
"If you go back to all the significant bear markets, you have a really critical retest before the end," said Rob Lutts, chief investment officer at Cabot Money Management. "We haven't really had that yet and I think we will."
Jobs: The labor market continued to get hammered in October, as demonstrated by two reports released Wednesday.
Job cuts announced by U.S. employers rose to 112,884 in October from 95,094 in September according to outplacement firm Challenger, Gray & Christmas. That marked the highest number of layoffs in almost four years.
Another report, from payroll services firm ADP, showed that the private sector lost 157,000 jobs last month, up from a revised drop of 26,000 last month.
The reports were especially worrisome ahead of Friday's big government report. That report is expected to show that employers cut 200,000 jobs from their payrolls in October. Meanwhile, the unemployment rate, which is generated by a separate survey, is expected to rise to 6.3% from 6.1% the previous month.
Economy: This week has already brought stark signs of the recession, including dour reports on manufacturing and factory orders, and the worst monthly auto sales in 25 years.
On Wednesday, the Institute for Supply Management's October reading on the services sector of the economy fell to 44.0 from 50.2 in the previous month, missing forecasts and pushing the index into near-recessionary territory.
Other markets: In global trade, Asian markets rallied and European markets weakened in late trade.
The dollar fell against the euro and the yen.
COMEX gold for December delivery fell $7.00 to $750.30 an ounce.
U.S. light crude oil for December delivery fell $5.32 to $65.21 a barrel on the New York Mercantile Exchange.
Gasoline prices fell another 2.6 cents to a national average of $2.365 a gallon, according to a survey of credit-card activity released Wednesday by motorist group AAA. The decline marks the 49th consecutive day that prices have decreased. During that same time period, prices dropped by $1.49 a gallon, or 38.6%.
Lending rates: The credit market continued to improve. The 3-month Libor fell to 2.51% from 2.71% Tuesday, hitting its lowest point in almost four years, according to Bloomberg.com. Overnight Libor fell to 0.32% from 0.38%. Libor is a key interbank lending rate.
The yield on the 3-month Treasury bill, seen as the safest place to put money in the short term, fell to 0.45% from 0.47% late Tuesday, with investors preferring to take a small return on their money than risk the stock market. Last month, the 3-month yield reached a 68-year low around 0% as investor panic peaked.
Treasury prices rose, lowering the yield on the benchmark 10-year note to 3.71% from 3.72% late Tuesday. Treasury prices and yields move in opposite directions.
