Stocks surged Wednesday after the Senate leaders crafted a last-minute agreement to avoid a U.S. default and reopen the government, pushing the Standard Poor’s 500 index close to a record high.
The Dow Jones industrial average (^DJI) soared jumped 205 points, or 1.4 percent, to 15,373, the Nasdaq composite index (^IXIC) rallied 45 points, or 1.2 percent, to 3,839, and the Standard Poor’s 500 index (^GPSC) jumped rose 23 points, or 1.4 percent, to 1,721 — just four points below the high watermark it hit on Sept. 18.
Senate leaders announced the agreement following a partial, 16-day government shutdown. Congress raced to pass the measure by day’s end. Without a debt deal, the U.S. will hit a Thursday deadline after which it could no longer borrow money to pay its bills, increasing the chance of a default on government debt. But it now appears nearly certain the House will follow the Senate’s lead and avert disaster.
Despite the gridlock in Washington, investors have stayed largely calm throughout the twists in the current fiscal drama in Washington. Even before Wednesday’s news, the SP 500 and the Dow were up for the month.
While the issues in Washington continued to be the market’s primary driver, analysts said the focus would likely turn to the third-quarter earnings season.
With 11 percent of SP 500 companies having reported, about 57 percent have topped profit expectations, a rate that is below the historical average of 63 percent. The number of companies topping revenue forecasts has also been below the historical average.
In commodities trading, benchmark crude for November delivery rose $1.08, or 1.1 percent, to $102.29 a barrel, while gold gained $9.10, or 0.7 percent to $1,282.30 an ounce.
In corporate news, JPMorgan Chase (JPM) agreed to pay a $100 million penalty and admitted that its traders acted “recklessly” during a series of London trades that ultimately cost the bank $6 billion.
The settlement announced Wednesday by the Commodity Futures Trading Commission comes less than a month after the nation’s largest bank agreed to pay $920 million and admit fault in a deal with the Securities and Exchange Commission and other U.S. and British regulators.
Intel (INTC) late Tuesday gave a revenue outlook that missed expectations and warned that production of its upcoming Broadwell processors was delayed. However, shares of the Dow component rose 1.3 percent to $23.69 as the stock participated in Wednesday’s broad market rally.
More Stocks in the News:
- Shares of Yahoo (YHOO) eased back after rising earlier a day after the company reported third-quarter earnings that were slightly above forecasts by analysts. The company’s shares ended Wednesday trading down 28 cents, or 0.8 percent, at $33.10.
- Mattel (MAT) gained 1 percent to $41.97 after the company’s third-quarter net income rose 16 percent, thanks to high demand for dolls like its Monster High, Barbie and American Girl lines. The results were better than Wall Street analysts had forecast.
- Bank of America (BAC) rose 2.2 percent to $14.56 after the second-largest U.S. bank reported that it earned $2.5 billion in the July-September period, up from $340 million a year earlier. On a per-share basis, earnings were 20 cents, beating the 19 cents expected by financial analysts.
- Stanley Black Decker (SWK) plunged 12.8 percent to $76.74 after the company lowered its profit forecast for the year, citing slower growth in emerging markets and a hit from the U.S. government shutdown.
- Green Dot (GDOT) fell 1 percent to $20.66 after an analyst cut his rating on the banking holding company, citing its tough competition.
- Shares of obesity drug maker Vivus (VVUS) fell 3.8 percent to $9.68 after a Piper Jaffray analyst downgraded the stock to “Neutral” from “Overweight,” citing a disappointing sales forecast for its drug Qsymia. The analyst also trimmed his price target on the stock to $11 a share from $14.
- Shares of oil and natural gas pipeline company Plains GP Holdings (PAGP) ended right back where they started in their New York Stock Exchange debut. The IPO was priced at $22, and though trading opened at $22.75, the stock closed Wednesday at $22.
What to Watch Thursday:
- The Labor Department reports weekly jobless clams at 8:30 a.m. Eastern time.
- Freddie Mac releases weekly mortgage rates at 10 a.m.
These major companies are scheduled to release quarterly earnings statements:
- UnitedHealth Group (UNH)
- Goldman Sachs Group (GS)
- Philip Morris International (PM)
- Verizon Communications (VZ)
- Union Pacific (UNP)
- AMR (AAMRQ)
- Google (GOOG)
- Capital One Financial (COF)
- Chipotle Mexican Grill (CMG)
–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.
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.”