A weak outlook for economic growth in Europe and European Central Bank president Mario Draghi's warning of a slowdown in Germany also weighed on the market.
The Dow Jones industrial average dropped 313 points, or 2.4%, logging its worst daily decline since November 2011.
The Nasdaq and S&P 500 also both sank more than 2%, clocking their worst drop since early June. Coal and for-profit education stocks led the declines on both indexes.
"This is purely a reaction to the political landscape and an investor response to the policies on the table -- all the new regulation that will add to the costs of doing business for certain industries and sectors" said Jack Ablin, chief investment officer at BMO Private Bank. "Financials are getting hit the hardest, and energy isn't far behind."
Though the sell-off was broad and deep, Ablin said it's likely a one-day reaction, and not harbinger of a bear market.
In fact, during the two days after Obama was elected in 2008, the Dow plunged more than 900 points, or 10%. But during the past four years, the index has climbed almost 40%. And year to date, all three indexes are up between 6% and 13%.
Wall Street had been overwhelmingly in favor of Mitt Romney, and considered him to the more business-friendly candidate, especially when it came to the regulatory environment.
But with the election behind them, investors are quickly moving on to what Tuesday's results mean for the looming fiscal cliff, the market's biggest headwind, according to market strategists and money managers recently surveyed by CNNMoney.
"We have only have 10 legislative days to make something happen," said Ablin. "Obama has said he will reject any proposal that doesn't include tax hikes on the wealthy, so we see the same kind of contention that we saw during the debt ceiling battle that eventually led to a downgrade by Standard and Poor's."
If lawmakers fail to address the simultaneous onset of tax hikes and spending cuts that will be triggered on Jan. 1, they risk throwing the U.S. economy back into a recession and driving unemployment up even higher.
Fitch Rating said Wednesday that Obama needs to "quickly secure agreement on avoiding the fiscal cliff and raising the debt ceiling," and cautioned that failure to do so "would likely result in a rating downgrade in 2013." Fitch has so far maintained its AAA rating for the United States.
Late Wednesday afternoon, House speaker John Boehner said the Republican majority in the House is ready to work with the president to do what's best for the country. Boehner said his party would be "willing to accept new revenue" in a budget deal as long as they support economic growth and are joined by a more comprehensive tax reform.
As investors bailed out of stocks, they shifted into safer havens, like U.S. Treasuries, pushing the yield on the 10-year note down to 1.64% from 1.74% late Tuesday. Gold, which is also considered a safe haven, fell $1 to settle at $1,714 an ounce.
Meanwhile, Europe's debt crisis reared its ugly head once again, with Draghi warning that the region's debt problems are starting to take their toll on the economy in Germany, which has so far been relatively insulated.
Separately, the European Commission forecast a 0.3% decline in economic activity in the European Union this year, and subdued growth in 2013. The eurozone economy is expected to contract 0.4% this year, and be stagnate in 2013.
The dollar initially eased against the major world currencies but reversed course. The dollar rose 0.4% against the euro and 0.1% versus the British pound. The dollar declined against the Japanese yen.
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