All the major US markets fell, with the Dow Jones Industrial Average closing down over 312 points (2.36%). Investors fear an impasse in Congress as politicians spar over a political solution to the expiration of Bush-era tax cuts and the automatic imposition of draconian spending cuts set to begin at the year end.
The tax rises and cuts are meant to tackle the US's $16tn debt.
Democrat Senate leader Harry Reid told reporters in Washington he's "not for kicking the can down the road" and that any solution should include higher taxes on "the richest of the rich".
"The vast majority of the American people — rich, poor, everybody agrees — the richest of the rich have to help a little bit," Reid said.
Republican House Speaker John Boehner sounded a reconciliatory note. "Let's rise above this dysfunction and do the right thing for our country," he said.
But Boehner warned that any deal would have to include spending cuts.
The leading Republican added that Obama had called for a balanced approach to address the US's massive debts.
"A balanced approach isn't done by raising taxes now and ultimately failing to cut spending in the future," he said.
Economists and the Congressional Budget Office (CBO) have warned that failure to find a solution could plunge the US back into recession. Without action, the US faces a "significant recession" and the loss of some 2m jobs, CBO director Doug Elmendorf said recently.
Dan Greenhaus, chief global strategist for BTIG, said he and most of Wall Street had been expecting an Obama victory but that the win had focussed attention on the fiscal cliff. He said that a Republican victory might have made a resolution more likely and said his "baseline scenario" was now a failure to reach a compromise.
"Everyone thinks they will just kick the can down the road," he said. "I think these idiots will push us over the cliff." The consequences he says will be "very, very bad".
Greenhaus compared the situation to the political fight over raising the debt ceiling in 2011. While a compromise was eventually reached the fight led to an historic downgrade in US debt and triggered panic around the world.
"In any event, should Congress prove unable to prevent the cliff from being triggered, investors must then contend with duration. If the cliff's issues are solved immediately, then we imagine there will be little economic fallout.
"If the debate lingers, it's almost impossible to see the US economy withstanding the economic and confidence blow. It will not be Armageddon, but neither will it be sunshine and rainbows," he said in a note to investors.
David Kelly, chief global strategist for JP Morgan Funds, said investors should not make too much of the cliff. "It's important not to think there's a crisis when there isn't, because then you overreact," Kelly said. "There's an idea out there that there will be some crisis if we don't deal aggressively with the problem right now. We just need to deal with the debt problem moderately not aggressively."
Kelly said "the fiscal cliff will lead to more market volatility until it gets solved. But when it gets solved, I think the market will move higher." He suggested Congress could fashion a more gradual solution to debt reduction than the jumping off the fiscal cliff – cutting the US's debt-to-GDP ratio by one percentage point a year for example.
But others warned of issues ahead. In a note Fitch Ratings wrote: "Fitch estimates that the fiscal cliff would tip the US economy into an unnecessary and avoidable recession and result in an increase in the unemployment rate to above 10% in 2013."
The ratings firm threatened the US with a downgrade if lawmakers failed to resolve the cliff: "Failure to avoid the fiscal cliff and raise the debt ceiling in a timely manner as well as securing agreement on credible deficit reduction would likely result in a rating downgrade in 2013," Fitch said. Rival Moody's has previously also threatened to downgrade the United States's credit rating if the fiscal cliff isn't resolved.
For the US, a downgrade by all three big credit-ratings firms – Fitch, Moody's and S&P – could increase borrowing costs, the same way that a lower credit score for consumers would increase their interest rates on personal loans.
With the election behind them, most analysts and investors seem to be expecting gridlock to reign once more.
Brian Kessler, an economist with Moody's Analytics, didn't hold out much hope that the fiscal cliff would be resolved without a fight. "By returning a divided government to Washington, the electorate has given neither party a clear mandate to address the lackluster recovery, the fiscal cliff, and the looming debt crisis," he wrote on Wednesday.
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