Dow tumbles most in year, Treasuries rally on budget showdown

U.S. stocks slid, sending the Dow Jones Industrial Average to its biggest drop in a year, oil sank and Treasuries surged the most in five months as President Barack Obama’s re-election set up a budget showdown with the Republican-controlled House.

The Dow tumbled 312.95 points, or 2.4 percent, to 12,932.73 for its worst drop since Nov. 9, 2011. The Standard & Poor’s 500 Index, which is up 64 percent since Obama took office in 2009, lost 2.4 percent to 1,394.53, its lowest level since August. Ten-year U.S. yields sank 12 basis points to 1.64 percent. Oil slid almost 5 percent in its biggest decline of the year.

Obama now faces negotiating with Congress to avoid the so- called fiscal cliff of more than $600 billion in tax increases and spending cuts next year that threaten to slow U.S. growth. European stocks erased early gains as concern grew that the debt crisis was hurting Germany’s economy, while Greek police beat back anti-austerity protesters outside parliament.

“It’s a rush to safe haven,” said James Paulsen, the chief investment strategist at Minneapolis-based Wells Capital Management, which oversees about $325 billion. “We’re selling off further on rising fears about what a fiscal cliff negotiation is going to mean here. People bring all their worst fears in. At the end of the day, you have the fiscal cliff, Europe and you see a risk-off trade.”

‘Stocks Are Worth Less’

Obama now must decide how to contend with opposition from Republicans who demand a tax-cut extension for all income levels.

Some congressional Republicans, especially in the Senate, have said they may be willing to consider eliminating some tax breaks to help pay for avoiding automatic cuts to defense programs.

“The marginal income-tax rate is probably going to go up with this fiscal resolution, you know, from 35 to 40 percent, capital gains from 15 to 20, dividends from 15 to who knows where,” Bill Gross, co-chief investment officer of Pacific Investment Management Co., told Bloomberg Television. “And ultimately if dividend and capital-gains tax rates go up, then stocks are worth less and that’s what you’re seeing.”

Market Leaders

Gauges of energy, financial, technology, telephone, industrial and utility shares lost more than 2 percent to lead declines in all 10 of the main industry groups in the S&P 500. Bank of America Corp. and JPMorgan Chase & Co. slid at least 5.6 percent while Hewlett-Packard Co., Exxon Mobil Corp. and UnitedHealth Group Inc. lost at least 3.8 percent for the biggest declines in the Dow, which slid as much as 369 points.

The KBW Bank Index sank 4.6 percent, the most since June, as all 24 of its companies retreated. Bankers were hoping Romney would win and give them more sympathetic regulators or that Republicans would take the Senate and they could rewrite the Dodd-Frank overhaul of the industry, said Edward Mills, a bank policy analyst at FBR Capital Markets in Arlington, Virginia, and former aide on the House Financial Services Committee.

“Neither happened and the floodgate is going to open for the final rules under Dodd-Frank to go into effect and it’s likely to come in the next three to six months,” Mills said. “The industry has gone from a posture of trying to delay to now where they are going to be pushing for certainty.”

The iShares Dow Jones U.S. Aerospace & Defense Index Fund, which tracks contractors such as United Technologies Corp., Boeing Co. and Lockheed Martin Corp., sank 3 percent. “This is ‘Ground Zero’ for Fiscal Cliff stress,” Dave Lutz, head of ETF trading and strategy at Stifel Nicolaus & Co. in Baltimore, said in a note to clients.

Peabody Energy Corp., Alpha Natural Resources Inc. and other U.S. coal producers slumped on speculation that Obama’s re-election will mean more regulation for the industry.

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