By KEN SWEET
NEW YORK — The stock market retreated from all-time highs Wednesday after the Federal Reserve said the U.S. economy still needed help from its stimulus program.
In its latest policy statement, the nation’s central bank said it will continue buying $85 billion in bonds every month and keep its benchmark short-term interest rate near zero. The bond purchases are designed to keep borrowing costs low to encourage hiring and investment. The Fed said it would “await more evidence” that the economy was improving before starting to pull back its stimulus program.
The Fed’s announcement was mostly expected by investors. Since the Fed’s last meeting in September, the economy suffered a blow because of the 16-day partial shutdown of the U.S. government and the near-breach of the nation’s borrowing limit.
As a result, investors thought it would be highly unlikely the Fed would make any changes to its stimulus program until was more evidence that the U.S. could grow without the central bank’s help.
The soonest the Fed could revisit its bond-buying program will be at its mid-December meeting. However, Ben Bernanke’s term as Fed chairman ends in February and his successor, Janet Yellen, has yet to be confirmed by the Senate. It is seen as unlikely Bernanke would take on such a large project like pulling back on the bond-buying program when he only has months left in the position.
“We’re looking at March of next year at the earliest” before the Fed will start to pull back, said Dean Junkans, chief investment officer for Wells Fargo Private Bank.
On Wednesday, the Dow Jones industrial average (^DJI) lost 61.59 points, or 0.4 percent, to 15,618.76. The Standard Poor’s 500 index (^GPSC) fell 8.64 points, or 0.5 percent, to 1,763.31. The Dow and SP 500 closed at record highs Tuesday. The Nasdaq composite (^IXIC) fell 21.72 points, or 0.6 percent, to 3,930.62.
Bond prices also fell after the Fed’s announcement. The yield on the benchmark U.S. 10-year Treasury note rose to 2.54 percent from 2.50 percent the day before.
Stocks of home construction companies fell after the Fed said in its policy statement that “the recovery in the housing sector slowed somewhat in recent months.” Last month, the Fed said housing “has been strengthening.”
KB Home (KBH) fell 47 cents, or 3 percent, to $17.49. Luxury homebuilder Toll Brothers (TOL) fell 56 cents, or 2 percent, to $33.56 and PulteGroup (PHM) fell 21 cents, or 1 percent, to $18.00.
Despite the decline Wednesday, October has been a big month for the stock market. With just two days of trading left, the SP 500 is up 4.9 percent, putting the index on track for its best month since July.
Investors also had another dose of quarterly earnings to work through.
General Motors (GM) rose $1.17, or 3 percent, to $37.23. After taking out one-time effects, the nation’s largest automaker earned $1.7 billion, or 96 cents per share, beat analysts’ expectations of 94 cents per share.
Western Union (WU) plunged $2.39, or 12 percent, to $16.85. The money transfer company said late Wednesday that it may not see any profit growth in 2014 due to increasing regulation and compliance costs.
Facebook (FB) soared in after-hours trading after the company reported higher income than analysts were expecting. Facebook rose $5.87, or 12 percent, to $54.88. The social media network said it earned an adjusted profit of 25 cents per share for the third quarter, six cents better than what analysts were expecting. Revenue jumped 60 percent to $2.02 billion.
What to Watch Thursday:
- The Labor Department releases weekly jobless claims at 8:30 a.m. Eastern time.
- Freddie Mac releases weekly mortgage rates at 10 a.m.
These major companies are due to report quarterly financial results:
- Anheuser-Busch InBev (BUD)
- Exxon Mobil (XOM)
- MasterCard (MA)
- Royal Dutch Shell (RDS-A) (RDS-B)
- Sony (SNE)
- Starbucks (SBUX)
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.”
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