Closing Bell: Stocks Head Higher for 4th Straight Day

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Richard Drew/AP
Decent corporate earning had investors in a good mood Tuesday, sending the stock market higher for the fourth straight day.

The tech-heavy Nasdaq (^IXIC) rose 16.4 to 3,502. The Dow Jones industrial index (^DJI) picked up 75 points to end at 15,299, while the S&P 500 (^GPSC) gained 10.5 points to 1,651.

After spending much of last month focused on the Federal Reserve and its plans for economic stimulus, investors are turning their attention to corporate earnings and what the rest of the year holds. Though many companies are expected to post modest earnings.

Analysts at investment bank Goldman Sachs said in a note Tuesday that they expected second-quarter earnings growth of about 2 percent. They predicted that revenue growth would remain weak, however, hurt by a lackluster economy and a stronger dollar.

In another sign of a brightening economy, the U.S. saw fewer foreclosures in May compared with a year ago, while the number of houses in the foreclosure process also declined as the market continued to heal, according to CoreLogic. The data-analyst firm reported 52,000 foreclosures were completed, well below the 71,000 in May 2012. Even so, the number was up from 50,000 in April 2013.

Companies making news Tuesday:
  • Shares of FedEx (FDX) shot up on speculation that billionaire William Ackman would make a big investment in the company. The stock rose 4.4 percent to $103.15 on strong volume.
  • WD-40 Co. (WDFC) reported earnings that beat analyst forecasts but still ended the day down 56 cents, or nearly 1 percent, to $57.09.
  • Barnes & Noble (BKS) rose 95 cents, or 5.4 percent, to $18.61 after the bookseller said Monday its CEO is leaving after three years. The company didn't name a replacement.
  • IBM (IBM) fell $3.73, or 1.9 percent, to $191.25 after a Goldman Sachs (GS) analyst lowered his rating and cut his price target on the stock, saying the tech giant may face more pressure in the near term in emerging markets.
  • Research In Motion (BBRY) won formal approval from shareholders to legally change its name to BlackBerry at its annual meeting. The Canadian company announced plans for the name change back in January, and since has been going by BlackBerry in marketing materials. BlackBerry shares rose 0.9 percent to $9.64.
  • Private-equity firms MidOcean Partners and Vulcan Capital have teamed up to buy dental product maker Water Pik from another group of investors. Terms of the deal weren't disclosed. Water Pik makes water flossers, sonic toothbrushes and other dental products. The Fort Collins, Colo., company also sells replacement showerheads.
  • Nutritional-product maker Hi-Tech Pharmacal Co. (HITK) rose slightly more than 5 percent to $35.22 despite reporting a $4.6 million loss in its fiscal fourth quarter. Revenues fell an unexpected 5 percent.
  • Intuitive Surgical (ISRG) skidded 16.4 percent to $418.17 after revising down its revenue outlook for the second quarter. The company cited slow sales of its robotic surgery machines.
  • Laboratory Corp. of America Holdings (LH) fell $4.26, or 4.3 percent, to $95.89, following release of new Medicare reimbursement proposals Monday, which could result in increased scrutiny of lab reimbursement claims.
  • Varian Medical Systems (VAR), a maker of medical devices and software for treating cancer, fell $1.89, or 2.8 percent, to $66.31.

What to watch Wednesday:
  • American Greetings (AM) and Family Dollar Stores (FDO) report quarterly earnings before U.S. markets open.
  • The Commerce Department releases wholesale trade inventories for May at 10 a.m. Eastern time.
  • The Federal Reserve releases minutes from its June policy meeting at 2 p.m.
  • Yum Brands (YUM) and PriceSmart (PSMT) report quarterly earnings after U.S. markets close.
-Compiled from staff and wire reports.

If You Only Know 5 Things About Investing, Make It These
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Closing Bell: Stocks Head Higher for 4th Straight Day

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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