Although both chambers of Congress passed the debt ceiling increase, markets plunged across the board as investors feared a new age of austerity and sluggish growth in the U.S. market. The Dow finished the day lower by 266 points while the broader indexes experienced heavier losses as the S&P 500 fell by 2.6% and the Nasdaq sank by 2.8%. Banks, services and industrials led the way on the downside while telecom, and some consumer firms managed to at least avoid much of the plunge that some of their more cyclical counterparts experienced. Commodities were extremely volatile as well, as investors clamored for gold in record numbers as the price of the safe haven commodity soared by 2.3% on the day to finish just shy of $1,660/oz. Meanwhile, more industrial focused commodities fell on the day as lumber, copper, and oil all experienced declines as WTI crude ended the session at the $93.25 mark. Even more surprising was the great desire for U.S. government bonds on the day as 10 Year notes saw yields plunge by 14 basis points while the two year’s yield fell by five basis points down to just 0.33%.
One of the biggest ETF winners on the day was the Market Vectors TR Gold Miners ETF (GDX) which gained 1.9% in Tuesday trading. Today’s gains came thanks to robust demand for gold as the precious metal reached another new high in today’s trading session. This boost in interest for gold was blamed by many on the debt deal in Washington, as the agreement does little to change the wave of government spending and still could cause a downgrade of American sovereign debt, helping to boost uncertainty in the marketplace. Gold prices were also supported by news out of South Korea, as the nation’s central bank announced that it has bought 25 tons of gold in the past two months. While this obviously isn’t a gigantic sum, it does represent a more than 100% increase in the nation’s gold reserves and is the first time that the country’s bank has bought gold in more than a decade. Thanks to these factors, it was a pretty good day for gold investors and especially those in GDX, as this fund managed to outpace broad benchmarks by an extremely wide margin on the day [see holdings of GDX here].
One of the biggest losers in the ETF world was the Industrial Select Sector SPDR (XLI) which plunged by 3.5% on the day. Today’s heavy losses, which came on volume that was nearly double the daily average, were largely the result of fears over spending programs and the health of the economic system. Both of XLI’s biggest components, GE and United Technologies, were down more than 4% on the day as the prospect over a dramatic reduction in both military spending and industrial demand hit these two stocks hard in Tuesday trading. Furthermore, some analysts, such as Michael Feroli at J.P. Morgan, stated that the deal would subtract roughly 0.3% from 2012 GDP growth. Considering how weak the economy has been, markets didn’t take kindly to this prediction, and those in the very cyclical sector of industrials were hit especially hard by these gloomy expectations [see charts of XLI here].
Disclosure: No positions at time of writing.