Barack Obama didn't have much time to savor his victory. The day after he was reelected as president, the Dow Jones Industrial Average dropped 300 points—the biggest plunge this year. The selloff continued Thursday when the Dow fell 121 points to 12,811, its lowest level since July.
It's rarely wise to use such a short window of trading as an indicator of a broad economic trend. But in this instance, according to Ernie Dawal, chief investment officer for SunTrust Bank, Wall Street directly reacted to an election that failed to shift the balance of power in Washington.
"We don't have any clear bellwether to know if there's going to be significant change," says Dawal. "The same risks in the near term that were there before the election are still there. The investors who were hoping there was going to be a change in the administration have now been disappointed."
A number of fiscal challenges loom, all of which have a direct impact on consumers. Some, like the fiscal cliff, need to be dealt with immediately. Others, like reductions in federal spending to reign in national debt, will be dealt with over the long term.
Given the stasis in Washington, tackling these challenges will be a daunting task. Shawn Ritenour, a professor of economics at Grove City College, says Washington's past inability to deal with pressing economic crises and the apparent lack of economic expertise among politicians inspires little confidence.
"Obama will claim that the American people are tired of fighting, and we have to work together," he says. "The reality is he has to deal with Congress, and Congress has to deal with him. Any electoral honeymoon is going to be brief."
The fiscal cliff. The most immediate threat to American consumers is the fiscal cliff. By the end of the year, Congress will decide whether to make cuts in federal spending and whether to extend the Bush-era tax cuts that would affect U.S. consumers and businesses.
Nearly everyone agrees that going over the fiscal cliff—which would result in higher taxes and federal spending cuts—would send the country back into recession. According to an October report from the National Association of Manufacturers, doing nothing would cause the economy to contract by $500 billion, or 3.2 percent of GDP. A family making more than $50,000 would see an $80 increase in taxes each month.
Bob Phillips, managing principal at Spectrum Management Group, a wealth management firm in Indianapolis, says he believes Congress will come up with a short-term compromise. "There's no question that both parties look at the fiscal cliff and know there's a negative impact on GDP," if the country goes over it, Phillips says. "In the next few weeks, they should arrive at an agreement. That's the rational thing to me. But we've all been fooled before."
Liz Ann Sonders, chief investment strategist at Charles Schwab, acknowledges that the fiscal cliff would send the economy into a recession. However, she says there is a growing sentiment that the recession would not be that bad.
"It's hard to get hurt when falling out of a basement," she says, referring to the tepid nature of the current recovery. Going over the cliff "forces fiscal sanity," she says.
Long-term focus on reducing debt. Politicians in both parties acknowledge that federal spending is out of control and needs to be reduced, but are split on what programs should be cut.
One area that's likely to see reductions is defense. Many of the automatic spending cuts set to take effect in January focus on defense programs.
Defense spending is likely to decrease in future budgets even if these automatic cuts are avoided. (In the president's 2013 spending plan, $487 billion was cut from Pentagon spending.) This would hurt members of the military and their families, as fewer soldiers would be needed, and those who stay enlisted would see cuts in benefits and pay. Reenlistment bonuses would also diminish or disappear.