Closing Bell: S&P 500 Sets Record as Investors Refocus on Earnings

U.S. Stocks Fall After Debt Deal as IBM, Goldman Tumble
Scott Eells/Bloomberg via Getty Images

U.S. markets ended mostly higher Thursday as investors shrugged off the more-than-two-week-long government shutdown and began to focus on corporate earnings, but a few troubled blue chips dragged the Dow to a small loss.

The Dow Jones industrial average (^DJI) lost 2 points to 15,371, the Nasdaq composite index (^IXIC) climbed 23 points, or 0.6 percent, to 3,863, and the Standard Poor’s 500 index (^GPSC) gained 11 points, or 0.6 percent, to 1,733, breaking its all-time record.

The Dow was held in check by IBM (IBM), Goldman Sachs and UnitedHealth. IBM said Wednesday that its third-quarter net income rose 6 percent, but revenue fell and missed Wall Street’s forecast by more than $1 billion. The technology giant’s shares fell 6.5 percent to $174.57.

Meanwhile, Goldman Sachs (GS) reported its revenue fell sharply in the third quarter, as trading in bonds and other securities slowed. The investment bank’s shares slumped 2.6 percent to $158.11. And UnitedHealth Group (UNH) lost 5.1 percent to $71.35, after the health insurance giant narrowed its 2013 profit forecast instead of raising it, giving some analysts pause.

Market analysts say the 16-day partial shutdown of the government caused billions of dollars of damage to the U.S. economy due to the furloughs of government employees, delayed government contracts, and declines in tourism at national parks, among other things. Analysts at Wells Fargo (WFC) said the shutdown likely cut 0.5 percentage points off of U.S. economic growth.

Dallas Federal Reserve President Richard Fisher said he is seeing signs of the United States re-entering a “housing bubble,” and warned about the U.S. central bank’s ongoing purchases of mortgage-based bonds.

“I’m beginning to see signs not just in my district but across the country that we are entering once again a housing bubble,” Fisher told reporters. “So that leads me … to be very cautious about our mortgage-backed securities purchase program.”

In economic news, data showed the number of Americans filing new claims for unemployment benefits dropped from a six-month high last week but remained elevated as California continued to deal with a backlog related to computer problems.

Other data showed the pace of manufacturing growth in the U.S. mid-Atlantic region slowed slightly in October, but firms’ optimism about the future hit a 10-year high, a survey showed.

Corporate earnings are expected to continue to dominate trading for the next couple weeks. So far, only 79 companies in the SP 500 have reported third-quarter results, according to SP Capital IQ. Analysts expect earnings at those companies to increase 3.3 percent over the same period a year ago.

In commodities treading, oil prices fell to their lowest level since early July as relief faded over a U.S. deal to avoid a default on its debts. Benchmark crude for November delivery fell $1.62, or 1.6 percent, to $100.67. Gold rose, picking up $37.90, or 0.3 percent, to end at $1,319.90

In corporate news, eBay (EBAY) dropped 4.1 percent at $51.34 and was the biggest drag on the Nasdaq 100 index. The company gave a disappointing holiday forecast Wednesday, saying the U.S. economic environment had deteriorated partly because of the government shutdown.

More Stocks in The News:

  • Verizon Communications (VZ), however, was a bright spot as shares rose 3.5 percent to $48.90 after the company posted stronger-than-expected third-quarter earnings and revenue.
  • General Motors (GM) said its global sales rose 4.6 percent to more than 7.25 million in the first nine months of the year, as strong third-quarter demand in the U.S. and China helped offset declines in Europe and South America. The stock rose 1.5 percent to $35.64.
  • Ariad Pharmaceuticals (ARIA) rose 11.4 percent to $4.50 after a JPMorgan analyst said recently disclosed side effects of Ariad’s cancer pill Iclusig may not hurt sales as much as investors fear.
  • Stanley Black Decker (SWK) shares fell for a second session Thursday, after the tool company lowered its projections for the year. Shares fell 3.1 percent to $74.37, after plunging 14 percent Wednesday.
  • Best Buy (BBY) climbed to a multiyear high after an Oppenheimer analyst lifted the consumer electronics retailer’s rating to “Outperform” from “Perform” and boosted his price target on the stock to $50 from $36, on increased confidence in the company’s turnaround strategy. Shares ended Thursday trading at $42.80, a gain of 2.9 percent.

What to Watch Friday:

  • The Conference Board releases leading indicators for September at 10 a.m. Eastern time.

These companies are scheduled to report quarterly financial results before U.S. markets open.

  • General Electric (GE)
  • Honeywell International (HON)
  • Morgan Stanley (MS)

Compiled from staff and wire reports.

  • 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.

    1. Compound interest is what will make you rich. And it takes time.

  • 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.

    2. The single largest variable that affects returns is valuations — and you have no idea what they’ll do

  • 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.

    3. Simple is usually better than smart

  • 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.

    4. The odds of the stock market experiencing high volatility are 100%

  • 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.”

    5. The industry is dominated by cranks, charlatans and salesmen

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