Stocks Seen Heading Lower After Thursday's Record Close

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By Sreeja VN

U.S. stock futures point to a lower open Friday following Thursday's record highs, and ahead of corporate earnings statements from companies such as General Electric, Honeywell and Schlumberger.

Futures on the Dow Jones industrial average (^DJI) were down 0.2 percent, as were futures on the Standard & Poor's 500 index (^GPSC) and on the Nasdaq 100 index.

A number of major companies, including First Horizon National (FHN), State Street (STT), SunTrust Banks (STI), along with General Electric (GE), Honeywell International (HON) and Schlumberger (SLB), will announce quarterly earnings before market hours.

On Thursday, buoyed by stronger-than-expected quarterly earnings from a number of major companies, followed by a sharp drop in jobless claims, the Dow and S&P 500 rose to their all-time trading highs. However, the tech-heavy Nasdaq index (^IXIC) was weighed down by disappointing quarterly performances from Intel (INTC) and eBay (EBAY).

Investors are also expected to focus on the G-20 meeting starting Friday in Moscow, where finance ministers and central bank governors from member nations are expected to discuss fiscal policy, eurozone developments, financial supervision and International Monetary Fund reforms.

Analysts expect leaders to also discuss the U.S. Federal Reserve's plan to wind down its asset-purchase program.
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In Europe, the Stoxx Europe 600 index was trading down 0.4 percent, retreating from a seven-week high recorded in the previous session, while London's FTSE 100 was down 0.5 percent. Germany's DAX-30 was down 0.5 percent and France's CAC-40 was trading down 0.6 percent.

In Asia, markets traded mixed Friday, with Japan's Nikkei witnessing choppy trade ahead of the Diet's upper house elections Sunday.

Earlier in the day, data released by the government showed that Japan's All Industries Activity Index, which measures the monthly change in overall production by all sectors of the Japanese economy, rose at 1.1 percent in May, compared to analyst expectations of a 1.3 percent growth. The index posted a reading of 0.1 percent in April.

However, analysts pointed out that the sell-off in Japanese markets -- the Nikkei ended down 1.48 percent after falling 2.7 percent during intraday trade on Friday -- wasn't connected to any particular news.

"It's just positioning. The market was long, and the Nikkei Stock Average has failed to break significantly higher despite the fact that the S&P 500 breached its May highs. [For traders], if you don't like the move, you get out," said Ben Collett, head of Asian equities at Sunrise Brokers, MarketWatch reported.

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Stocks Seen Heading Lower After Thursday's Record Close

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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