Although U.S. equity markets surged to start the day, they faltered in the final hour of trading to finish the day flat despite solid political developments out of Washington. The Dow and the S&P 500 both finished more or less unchanged while the Nasdaq continued its short-term outperformance gaining 0.1% on the day. A similar trend was present in commodities as well where gold and oil both surged in early trading only to finish the day sharply lower; gold managed to barely hang on to the $1,400 mark while oil slid more than $1.2/bbl. in Tuesday trading. As a result of this sell-off in commodities, investors fled to the only safe haven left– short-term U.S. Treasurys– which saw incredible spikes in yield with rates surging by over 10 basis points on the two year note.
The biggest news on the day came from Washington as Obama and the Congressional Republicans reached a tentative deal on taxes heading into 2011. Under the plan, taxes will not rise above 35% for anyone while capital gains rates will remain at 15%. Additionally, there will be a 35% estate-tax rate after the first five million dollars while the program will also cut payroll taxes by 2% on the employee side, potentially adding close to $120 billion to workers’ pockets. The deal came as a surprise to many given the divisive nature of politics as of late and the opposition that both sides had to a compromise. As a result of the shock, markets rose to start the day as a variety of economists and analysts raised their growth projections for the American economy based on this news. “When the deal does get signed into law, it will force us to boost our [gross domestic product] estimates for 2011,” added economists at Bank of America Merrill Lynch. “Our current forecast assumes that unemployment benefits do not get extended and that the ‘Making Work Pay’ credit ends. So, we are talking about a $130 billion hit to disposable household income that does not materialize.” However, as the dollar strengthened in late session trading it dragged down commodities across the board which caused oil and basic material companies to tumble as well, an event which helped to erase any gains that the market had made earlier in the day.
One of the biggest gainers in the ETF world on the day was the iShares Russell 2000 Fund (IWM) which gained a modest 0.6%. While this was by no means a robust gain, it continued the short-term trend of small cap outperformance of the larger cap peers. Traditionally, small cap stocks are riskier than their large cap counterparts but with risks cropping up in a variety of markets investors have piled into small cap funds as a way to play local economies without as much risk. “On a stock-by-stock basis, small- and mid-caps may be better in a sense that if you are a large-cap, it is hard to get away from the issues that we see now, whether that be Europe’s sovereign debt issues or geopolitical risks,” said Ryan Crane, senior portfolio manager at Stephens Capital Management in Houston [see holdings of IWM here].
One of the biggest losers in the ETFdb 60 was the Market Vectors Gold Miners ETF (GDX) which tumbled by 2.3% on the day. Today’s losses came as a result of weakness in the price of gold which sank as investors sold off their positions in the commodity as the yellow metal hit an all time record before sliding back later in the session. “The market had really run out of momentum, and, although we made new highs, it was more on sentiment than on fresh business,” said Simon Weeks, head of precious metals at the Bank of Nova Scotia. This trend helped to put more pressure on gold miners since they are seen as a leveraged play on the price of gold bullion, sealing their fate to end Tuesday’s session[see more charts of GDX here].
Disclosure: Eric is long IWM.