By William L. Watts and Jeffry Bartash, MarketWatch
WASHINGTON (MarketWatch) -- A potentially deep U.S. recession and the sharpest global financial crisis since the Great Depression will give Democrat Barack Obama little time to bask in the afterglow of his historic win in the U.S. presidential election.
The decisive election victory "may help to instill a bit more confidence, but the problems have been well-documented," said Kenneth Broux, an economist at Lloyds TSB. "The economy is facing many, many difficulties."
U.S. markets on Wednesday tacked sharply lower while world financial markets were mixed. Strategists said investors are anxious to see the president-elect's next moves.
"The task for the new president is to first restore trust and confidence," said Jim Dunigan, managing executive for investments at PNC Wealth Management. "We saw a little bit of that ... [and] people are hopeful. He's got to deliver on that early."
President Bush on Wednesday said he would work to ensure a smooth transition so the new president can tackle economic and other problems quickly. Obama's presidential rival, Republican John McCain, also pledged support to help end the ongoing financial crisis.
Obama, the first black elected president, captured 52% of the nationwide vote and Democrats extended their majority control in Congress. The 47-year-old senator from Illinois won traditionally Democratic states and made strong inroads in GOP-leaning areas amid intense dissatisfaction with the Bush administration.
"What he did in this campaign was to be all-inclusive," said Colin Powell, a Republican who served as secretary of state in the Bush administration but backed Obama in this race, on CNN.
Yet Obama's party failed to win a so-called supermajority in the U.S. Senate that would have prevented minority Republicans from blocking Democratic initiatives via filibuster. Democrats gained five seats to 56, including two independents, with at least one seat still too close to call. Sixty seats are needed to prevent filibusters.
The reaction around the world was largely positive.
"At a time when we must face huge challenges together, your election has raised enormous hope in France, in Europe and beyond," said French President Nicolas Sarkozy.
"This is a moment that will live in history as long as history books are written," said U.K. Prime Minister Gordon Brown, who sent his "warmest congratulations" to Obama.
Japanese Prime Minister Taro Aso said he would work with Obama to "strengthen the Japan-U.S. alliance further and work toward resolving global issues such as the world economy, terror and the environment."
The Russian government, however, reacted cautiously and said it was up to Obama to improve deteriorating relations between the two countries.
The win wasn't a surprise, with all major U.S. pre-election polls signaling an Obama victory. View slide show: America votes.
The U.S. presidency is decided in the Electoral College, where Obama held a 349-163 edge, according to the latest tally, with two states not yet formally called. The tally far exceeds the 270 needed for victory. See full story.
Democrats were also on track to pad their majority in the 435-seat House of Representatives by 20 to 30 seats, reports indicated. In the 100-member Senate, where roughly a third of seats were up for election, Democrats held all their existing seats and picked off at least five Republican seats. The contest for one GOP-held seat in Oregon remained too close to call. See full story.
Obama swept to victory by promising change in a climate of unprecedented voter dissatisfaction with Washington in general and with the outgoing Bush White House in particular.
"A historic change of leadership now comes to match the historic financial and economic challenge," said Marco Annunziata, chief global economist at UniCredit MIB.
The outcome "will give Americans a powerful boost of confidence and optimism -- particularly important as lack of confidence has been a hallmark of the financial crisis from the very start," he said.
There remain plenty of unknowns, however. Annunziata noted Obama's criticism of free trade and said protectionist measures are always tempting at a time of economic crisis. Yet he saw encouraging signs in Obama's choice of advisers, most of whom are committed to free trade and international cooperation.
Obama's economic advisers have included former U.S. Federal Reserve Chairman Paul Volcker, University of Chicago economist Austan Goolsbee, former Clinton White House aides Jason Furman and Gene Sperling, and Clinton-era Treasury Secretaries Robert Rubin and Larry Summers.
Speculation will now turn to the shape of Obama's Cabinet, with particularly keen attention focused on the selection of a Treasury secretary to replace Henry Paulson, economists said.
Media speculation has centered on a range of potential nominees, including New York Federal Reserve Bank President Timothy Geithner and J.P. Morgan Chase (NYS:JPM) CEO James Dimon.
An upcoming summit of world leaders from the world's 20 largest industrialized and developing nations in Washington on Nov. 15 will also present a window into Obama's thinking on economic issues, although it's not clear how much of a role the president-elect will want to play.
Stimulus on tap
Expanding Democratic majorities in the House and Senate, meanwhile, make it more likely an Obama administration will press for a large stimulus package, though it's unclear how that will be squared with a surging budget deficit.
Paul Ashworth, an economist at Capital Economics, said the need for additional stimulus is "urgent." The last stimulus package, in the form of one-time tax rebates, provided only a temporary boost and quickly evaporated, Broux noted.
Yet Obama could face a budget deficit wider than any seen since World War II, when measured as a proportion of the overall economy. The federal government has already approved a $700 billion bank-bailout package and additional aid may be required to keep financial institutions operating and avert a collapse in lending.