By KEN SWEET
NEW YORK — Wall Street’s six-day rally stalled out on Friday as stocks ended the day mostly flat in quiet trading.
Bond yields continued to rise. The yield on the 10-year Treasury note climbed above the 3 percent mark. The yield hasn’t consistently traded above that level since July 2011. The increase will translate into higher interest rates on mortgages and other kinds of loans.
Energy stocks were among the biggest gainers after oil prices climbed above $100 a barrel for the first time since October. Offshore oil drilling companies Transocean (RIG) and Diamond Offshore (DO) each rose about 1.5 percent. Oil giant ExxonMobil (XOM) climbed 1 percent.
Sprint (S) jumped 83 cents, or 8 percent, to $10.79 following news reports that Japan’s Softbank, which owns Sprint, may use the company as a vehicle to purchase wireless competitor T-Mobile US (TMUS).
Most of Wall Street remains on vacation. Trading volume has been very low this week. Only 2 billion shares changed hands on the New York Stock Exchange on Friday, about 40 percent below the recent average.
There were no major economic reports or corporate earnings Friday.
The Dow Jones industrial average (^DJI) closed down 1.47 points, or 0.01 percent, to 16,478.41.
Even with Friday’s pause,
the stock market has been in rally mode heading into the end of the year. The Dow and SP 500 are up 2.4 percent and 2 percent respectively so far in December, with only two trading days left in the year. For 2013, the SP 500 is up roughly 29 percent, its best year since 1997, and the Dow is up 25.8 percent, its best year since 1996.
In the bond market, the yield on the 10-year Treasury note rose to 3 percent from 2.99 percent Thursday.
Bond yields have steadily climbed since Dec. 18, when the Federal Reserve announced it was paring back its bond-buying program. The purchases were aimed at keeping long-term interest rates low to encourage borrowing and hiring.
“Interest rates are on a road back to normalcy after being artificially suppressed by the Fed,” said Karyn Cavanaugh, market strategist with ING U.S. Investment Management. Cavanaugh said she expects the yield on the 10-year note to rise to about 3.5 percent by the end of 2014.
In Corporate News:
General Motors (GM) was also among the bigger movers Friday, falling 58 cents, or 1 percent, to $40.94. The automotive giant said it would have to recall 1.5 million cars in China to replace a bracket that secures a fuel pump.
Twitter (TWTR) fell $9.56, or 13 percent, to $63.75. Twitter has soared in recent days, prompting one Wall Street analyst to downgrade the company’s stock to the equivalent of “sell,” saying the rally was overdone. Even with Friday’s sell-off, the social media company’s stock is still up 53 percent this month.
What to Watch Monday:
- The National Association of Realtors releases its pending home sales index for November at 10 a.m. Eastern time.
- The Federal Reserve Bank of Dallas releases its December survey of manufacturers at 10:30 a.m. Eastern time.
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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