Closing Bell: Stocks Continue Rally on Upbeat Economic News

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Contractors work on a KB Home Vicino community in San Jose, California. David Paul Morris/Bloomberg
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Markets extend rally: Following Monday's rise, stocks kept their upward momentum going Tuesday. Market were buoyed by two positive economic reports, showing a pick up in the number of housing starts and low consumer inflation. The Dow industrials (^DJI) jumped 139 points to close just below 15,320. The Nasdaq (^IXIC) gained 31 points, and the S&P 500 (^GSPC) added 13.

Today's top stories:
  • The consumer price index in May rose just 0.1 percent -- a tenth of a percent lower than analyst forecasts -- after excluding volatile food and energy costs. Housing starts for the month rose 6.8 percent to a seasonally adjusted annual rate of 914,000 -- less than than the 11.4 percent rise analysts had forecast, but still healthy.
  • Investors also reacted to news that Sprint Nextel (S) is suing both Dish Network (DISH) and Clearwire (CLWR) to block a planned merger. Shares of Clearwire fell 1.3 percent, while Sprint and Dish both rose.
  • The rise in stocks came ahead of the conclusion Wednesday of a two-day meeting by Federal Reserve officials on how much longer the Fed will maintain its aggressive bond-buying program and record low interest rates.
  • In addition to the conclusion of the Fed meeting, items on the economic calendar to watch Wednesday include weekly reports on the number of new mortgage applications from the Mortgage Bankers' Association and crude-oil inventories from the Energy Information Administration.
  • On the earnings front, FedEx (FDX) is set to report earnings before U.S. markets open Wednesday. Analysts expect FedEx to report slightly lower profits but higher revenue. The company recently has seen a slump in high-end express-delivery services as businesses and consumers save money by switching to cheaper but slower shipping options. Analysts forecast that FedEx earned $1.96 a share in its fiscal fourth quarter on revenue of $11.46 billion, according to a FactSet survey.
The Associated Press contributed to this report.

If You Only Know 5 Things About Investing, Make It These
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Closing Bell: Stocks Continue Rally on Upbeat Economic News

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 S&P 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 S&P 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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