Closing Bell: Stocks Soar as Washington Hints at a Debt Ceiling Deal

APTOPIX Wall Street (Specialists Gregg Maloney, Patrick Murphy and Glenn Carell, left to right, work at their post during the IP
Richard Drew/AP

Stocks soared Thursday after investors enthusiastically responded to news of a possible deal among Washington lawmakers to break an impasse that threatened to push the country into default.

The three most-followed indexes all rose about 2.2 percent: The Dow Jones industrial average (^DJI) surged 323 points to 15,126, the Standard Poor’s 500 index (^GPSC) rallied 36 points to 1,692 and the Nasdaq composite index (^IXIC) jumped 82 points to 3,760.

The surge broke a three-week funk in the stock market. Stocks have steadily declined since mid-September as Washington’s gridlock got investors worried that the U.S. could default on its debt and wreak havoc on financial markets and the global economy.

A partial government shutdown has continued 10 days after congressional Republicans refused to pass a budget for the new fiscal year without an attachment to defund President Obama’s health care law.

A deal between the two political parties couldn’t come soon enough. Treasury Secretary Jack Lew has said the government will hit its borrowing limit on Oct. 17. That would leave the U.S. with enough cash to last just a week or two before a default became a real risk.

In another bullish signal, small-company stocks rose even more than the rest of the market. Those stocks tend to be riskier than large, well-established companies but can also offer investors greater rewards. A sharp increase in small-company stocks means investors are more comfortable taking on risk. The Russell 2000 index (^RUT) jumped 24.4 points, or 2.3 percent, to 1,067.86. The Russell is just 19.57 points below its all-time high of 1,087.43, which it reached Oct. 1.

In commodities trading, the price of benchmark crude oil for November delivery rose
$1.40, or 1.4 percent, to $103.01 a barrel, while gold lost 21.90, or 1.7 percent, to $1,285.00 an ounce.

In corporate news, Best Buy (BBY) shares jumped 7.6 percent to $39 on heavy volume. The electronics retailer is about to debut a trade-in promotion program where customers can swap an old smartphone for a $100 gift card that can be used to buy the new Apple (AAPL) iPhone 5s and 5c.

More Stocks in the News:

  • Shares of Stonegate Mortgage rose 14 percent to $18.25 in their trading debut Thursday, after the home lender raised nearly $114 million in its initial public offering. The Indianapolis-based company priced its offering of 7.1 million shares at $16 a share. That’s below the range of $20 to $22 a share that it expected.
  • Lindsay Corp. (LNN) fell 5.9 percent to $75.35 after posting earnings fell short of market expectations. The irrigation equipment maker reported a 19 percent jump in fourth-quarter net income on improved revenue but analysts were anticipating earnings of 91 cents a share on revenue of $155.7 million for the quarter.
  • L Brands (LTD) fell 4.1 percent to $56.60 after reporting sales at stores open at least a year climbed 1 percent in September, but the results fell short of Wall Street expectations. The Columbus, Ohio, company, which owns Victoria’s Secret, Bath Body Works and other brands, also said it plans to sell $500 million in new debt.
  • Teva Pharmaceuticals (TEVA) rose 3.6 percent to $40.59 after the generic drug maker announced it was cutting its workforce by 10 percent.
  • Ruby Tuesday (RT) plunged 17.1 percent to $6.26. The restaurant chain reported a wider first quarter loss than expected, citing increased competition a difficult economic climate.
  • Citrix Systems (CTXS) slumped 11.9 percent to $58.75 after the company warned investors that its third-quarter revenue and profit will miss Wall Street expectations.
  • Shares of Invesco (IVZ) rose 5.5 percent to $33.92 a day after the investment management company reported a 9.1 percent yearly jump in the amount of funds it manages. As of Sept. 30, Invesco had $745.5 billion in assets under management.
  • Aruba Networks (ARUN) shares jumped 6.4 percent to $19.38 after it said that it plans to buy back up to $100 million additional shares of its stock.
  • Shares of Gilead Sciences (GILD) advanced 6.5 percent to $62.74 after the company reported successful results from a trial of an experimental cancer drug.

What to Watch Friday:

  • The University of Michigan releases its initial survey of Consumer Sentiment for October at 9:55 a.m. Eastern time.

Note: The government shutdown has caused delays in various reports due out by the Labor and Commerce departments.

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

  • JPMorgan Chase (JPM)
  • Wells Fargo (WFC)

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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