NEW YORK (AP) — Stocks slid on Wall Street Thursday, a day after the Dow Jones industrial average logged its biggest one-day drop of the year, as investors fretted about the potential for gridlock in Washington.
The Dow closed down 121.41 points to 12,811.32, bringing its two-day loss to 434 points. The Standard and Poor's 500 index fell 17.02 points to 1,377.51 and the Nasdaq composite slipped 41.71 to 2,895.58.
The Dow plunged 313 points Wednesday, its fifth worst one-day drop following a U.S. presidential election. The biggest, in 2008, came in the midst of the financial crisis on the day after President Barack Obama won his first term.
The two-day slump came in the wake of Obama's re-election to a second term as investors turned their focus back to Europe's problems and the so-called fiscal cliff, a package of tax increases and government spending cuts in the U.S. that will occur unless Congress acts by Jan. 1. Investors see it as a serious threat to the economic recovery.
"The thinking before the election was that it would remove some of the uncertainty, but it seems to have done the opposite," said Tyler Vernon, chief investment officer at Biltmore Capital Advisors in Princeton, N.J.
Stocks are still up on the year, but well below the peak they reached in September. That was when the Federal Reserve announced a third round of its bond-buying program, which is intended to hold down borrowing costs and encourage lending.
The S&P 500 is 6 percent below its high close of the year, 1,465, which it reached on Sept. 14. That was its highest level in nearly five years. It's still up 10 percent for the year.
Investors may be tempted to sell appreciated stock before a possible increase in the capital gains tax at the end of the year, Vernon said. Tax cuts enacted by President George W. Bush expire at the end of this year and the U.S. government wants to cut a $1 trillion budget deficit.
"The mood of the market has certainly switched," said J.J. Kinahan, chief derivatives strategist at TD Ameritrade, as investors monitor developments on the fiscal cliff and wait for more clues about Obama's agenda.
Investors were encouraged by two reports on the U.S. economy that came out before the market opened. The Dow climbed as much as 48 points in the morning but started to sink after the first hour of trading.
The Dow fell steadily throughout the rest of the day, and more steeply in the last hour of trading. The Dow gave up 73 points in the last 40 minutes, accounting for more than half the day's loss.