How the Dow Survived the Shutdown While Gold Got Crushed

How the Dow Survived the Shutdown While Gold Got Crushed

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

In another example of Washington gridlock, lawmakers were unable to agree to keep the federal government functioning last night. As many had feared last week and yesterday, the government started shutting down today. But somewhat surprisingly, the stock market didn't react badly to the new reality, with the Dow Jones Industrials climbing about 60 points as of 10:45 a.m. EDT. Broader market measures were up even more sharply on a percentage basis, as investors apparently felt more comfortable with the certainty of a shutdown than they did with not knowing whether it would actually happen.

Even more surprising in light of the government shutdown was the plunge in gold prices today, with the SPDR Gold Trust falling more than 3% as gold prices dropped more than $40 to fall below $1,300 per ounce. Declines were broad-based throughout the commodity sector, with iShares Silver seeing even larger drops of more than 4% as silver prices fell more than $1 per ounce. Traditionally, precious metals served as a safe-haven investment to which investors fled when risk levels rose. Lately, though, gold and silver have responded like risky assets, with long-term fears of higher interest rates driving poor performances in recent months. News like the shutdown no longer seems to inspire investors to seek out gold, and that sentiment shift is a marked change from the conditions that helped gold climb during its decade-long bull market.

Within the Dow, Merck was the big winner, rising 2.4% as the company announced further moves to cut costs. The drug giant said it would lay off 8,500 employees, more than doubling the 7,500 layoffs the company had previously planned. Shareholders applauded the fact that Merck expects to save $2.5 billion annually from the moves, as well as the drugmaker's refocusing on drug development in areas with blockbuster potential. The question, though, is whether Merck will be able to get more from its research and development at the same time that it demands cost savings from R&D.

Finally, UnitedHealth climbed 1.3% as Obamacare's health-insurance exchanges began their open enrollment periods for 2014. From a longer-term perspective, UnitedHealth stock has been fairly choppy lately, with shares pulling back over the past few weeks as investors wait to see how the opening days and weeks of the exchanges go. In the long run, UnitedHealth has positioned itself to profit from Obamacare in many different ways, including its Optum health-services platform helping to educate current and potential policyholders about improving their health. Much depends on whether Obamacare attracts enough relatively healthy participants to avoid its becoming a costly high-risk pool that could spell big trouble for insurance-company players on the exchanges.

Is gold a smart buy after its big declines?
Today's drop in gold is just the latest setback for the precious metal, even though it has still outshined the stock market with strong returns since 2000. Find out what's next for the yellow metal and the best way to profit from the gold market in The Motley Fool's new free report, "The Best Way to Play Gold Right Now," which dissects the recent volatility and provides a valuable guide for gold investing. Click here to read the full report today!

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