By KEN SWEET
NEW YORK — Stocks rose in a holiday-shortened trading day Tuesday, helped by a report that showed American companies were investing in their businesses at the fastest pace since January.
Markets were open for just half a day ahead of the Christmas holiday, and trading volume was extremely light. Roughly 1.3 billion shares changed hands on the New York Stock Exchange, a third of what is traded on a regular day. It was the slowest day of the year.
Materials and industrial stocks rose more than the rest of the market after the government reported that orders for long-lasting manufactured products rose 3.5 percent in November, more than economists expected. Core capital goods, a category that tracks business investment, jumped 4.5 percent, the biggest gain since January.
The Dow Jones industrial average (^DJI) rose 62.94 points, or 0.4 percent, to 16,357.55. The Standard Poor’s 500 index (^GPSC) rose 5.33 points, or 0.3 percent, to 1,833.32 and the Nasdaq composite (^IXIC) rose 6.51 points, or 0.2 percent, to 4,155.42.
Stocks have been rising steadily since last Wednesday, when the Federal Reserve surprised investors by announcing it was cutting back its bond-buying program,
citing an improving economy. The Fed said it will reduce its bond purchases to $75 billion a month beginning in January, down from $85 billion.
The last five days of gains have added to what has been a historic year for stock market investors. The SP 500 index is up 28.6 percent for 2013, or 30.9 when dividends are included, its best year since 1997.
With four trading days left in the year, many traders expect stocks to continue higher until New Year’s Eve.
“Nothing has derailed this market this year, even with all the bad headlines of 2013,” said Jonathan Corpina, a New York Stock Exchange floor trader with Meridian Equity Partners. “We still have end-of-the-year cash coming in.”
Few investors expect stocks to continue to rise at this pace through 2014. On average, market strategists with the major investment banks expect the SP 500 to rise to 1,900 by the end of 2014, barely above where the index is trading at now.
“It’s basically been a straight line up for the last couple years and, as the saying goes, the bigger they are the harder they fall,” said Uri Landesman, president of the hedge fund Platinum Partners. Landesman said he also expects 2014 to more volatile for the stock market.
Homebuilder stocks rose after the government reported that new home sales rose at a faster pace than analysts were expecting last month. Beazer Homes (BZH) rose 62 cents, or 3 percent, to $24.03 and D.R. Horton (DHI) rose 16 cents, or 0.8 percent, to $21.29.
Bond prices fell on the latest positive news on the U.S. economy. The yield on the 10-year Treasury note, a benchmark for many kinds of loans including home mortgages, rose to 2.99 percent from 2.93 percent the day before.
In other corporate news, Tesla Motors (TSLA) jumped $7.70, or 5 percent, to $151.25. The National Highway Traffic Safety Administration kept its 5-star safety rating on the company’s Model S sedan, despite recent reports of battery-related fires. There have been no reported injuries or deaths related to any Tesla car fires.
What to Watch Wednesday:
- Stock and bond markets are closed for Christmas Day.
Warren Buffett is a great investor, but what makes him rich is that he’s been a great investor for two thirds of a century. Of his current $60 billion net worth, $59.7 billion was added after his 50th birthday, and $57 billion came after his 60th. If Buffett started saving in his 30s and retired in his 60s, you would have never heard of him. His secret is time.
Most people don’t start saving in meaningful amounts until a decade or two before retirement, which severely limits the power of compounding. That’s unfortunate, and there’s no way to fix it retroactively. It’s a good reminder of how important it is to teach young people to start saving as soon as possible.
Future market returns will equal the dividend yield + earnings growth +/- change in the earnings multiple (valuations). That’s really all there is to it.
The dividend yield we know: It’s currently 2%. A reasonable guess of future earnings growth is 5% a year. What about the change in earnings multiples? That’s totally unknowable.
Earnings multiples reflect people’s feelings about the future. And there’s just no way to know what people are going to think about the future in the future. How could you?
If someone said, “I think most people will be in a 10% better mood in the year 2023,” we’d call them delusional. When someone does the same thing by projecting 10-year market returns, we call them analysts.
Someone who bought a low-cost SP 500 index fund in 2003 earned a 97% return by the end of 2012. That’s great! And they didn’t need to know a thing about portfolio management, technical analysis, or suffer through a single segment of “The Lighting Round.”
Meanwhile, the average equity market neutral fancy-pants hedge fund lost 4.7% of its value over the same period, according to data from Dow Jones Credit Suisse Hedge Fund Indices. The average long-short equity hedge fund produced a 96% total return — still short of an index fund.
Investing is not like a computer: Simple and basic can be more powerful than complex and cutting-edge. And it’s not like golf: The spectators have a pretty good chance of humbling the pros.
Most investors understand that stocks produce superior long-term returns, but at the cost of higher volatility. Yet every time — every single time — there’s even a hint of volatility, the same cry is heard from the investing public: “What is going on?!”
Nine times out of ten, the correct answer is the same: Nothing is going on. This is just what stocks do.
Since 1900 the SP 500 (^GSPC) has returned about 6% per year, but the average difference between any year’s highest close and lowest close is 23%. Remember this the next time someone tries to explain why the market is up or down by a few percentage points. They are basically trying to explain why summer came after spring.
Someone once asked J.P. Morgan what the market will do. “It will fluctuate,” he allegedly said. Truer words have never been spoken.
The vast majority of financial products are sold by people whose only interest in your wealth is the amount of fees they can sucker you out of.
You need no experience, credentials, or even common sense to be a financial pundit. Sadly, the louder and more bombastic a pundit is, the more attention he’ll receive, even though it makes him more likely to be wrong.
This is perhaps the most important theory in finance. Until it is understood you stand a high chance of being bamboozled and misled at every corner.
“Everything else is cream cheese.”
Copyright 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.