Closing Bell: Markets Shake Off Washington Shutdown, End Day Higher

Markets React To Government Shutdown
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Despite ongoing rancor in Washington, investors stayed calm Tuesday, sending stocks higher on the first trading day of the final quarter of 2013, as the U.S. government began a partial shutdown.

The Dow Jones industrial average (^DJI) added 62 points, or 0.4 percent, to 15,191, the Standard & Poor's 500 index (^GPSC) edged up 13 points, or 0.8 percent, to 1,695 and the Nasdaq composite index (^IXIC) gained 46 points, or 1.2 percent, to 3,818.

The long-running dispute in Washington over President Barack Obama's health care law led Republican lawmakers to hold the U.S. budget hostage, forcing about 800,000 federal workers off the job and suspending all but essential government services. With the Republican-controlled House of Representatives and Democratic-controlled Senate locked in a stalemate, it was unclear how long it would be before the House and Senate could agree to pass a temporary budget to finance government activities.

Despite the political rancor, investors didn't push the panic button. That suggests that, at least for now, they aren't anticipating that the stalemate will last long enough to cause a serious disruption in the economy and threaten the slow-but-steady U.S. recovery -- or the current four-year bull run in the stock market.

In the latest encouraging news on the economy, a private industry group reported that U.S. manufacturing expanded at the fastest pace since April 2011 last month on stronger production and hiring.

%VIRTUAL-article-sponsoredlinks%But with the closure of federal agencies, the release of a report on construction spending for August, which had been scheduled for 10 a.m, was delayed. If no deal is reached by Friday, the closely watched monthly jobs report will also be delayed.

In commodities news, benchmark oil for November delivery fell 48 cents to $101.85 a barrel, while gold slipped $36.20 or 2.7 percent, to $1,290.30

The tech-heavy Nasdaq was given a boost by Apple (AAPL), which rose $11.25, or 2.4 percent, to $488, after billionaire investor Carl Icahn told CNBC about his dinner meeting with Apple's CEO Tim Cook. Icahn, who said he has invested $2 billion in Apple, is pushing for Apple to spend $150 billion buying its own stock. "I feel very strongly that this should be done," Icahn told CNBC. "It's a no-brainer." (AMZN) shares rose 2.5 percent to $320.56 after a Citigroup (C) analyst said in a research note Tuesday that the company's seasonal hiring plans indicate that the online retailer is expecting a strong holiday season. Amazon said it plans to hire 70,000 full-time seasonal workers in its 45 fulfillment centers in the U.S., a 40 percent increase from its holiday hiring last year.

More Stocks in the News:
  • Merck (MRK) led the Dow higher after saying it would cut 8,500 jobs and move its headquarters to save costs. Merck rose 2.4 percent to $48.75.
  • Ford Motor (F) moved up 1.8 percent to $17.18 after the company reported a 6 percent increase in its September sales. General Motors (GM) dipped 0.2 percent to $35.90 following its sales results.
  • Walgreen (WAG) rose 4.5 percent to $56.23 after the largest U.S. drugstore chain reported that its earnings soared 86 percent.
  • Smith & Wesson Holding (SWHC) said it plans to buy back up to $15 million of its stock and has eliminated its "poison pill" provision. CEO and President James Debney said in a statement that the company believes that investing in itself is presently one of its greatest opportunities. Shares of the Springfield, Mass.-based gunmaker rose 1.6 percent to $11.17 amid a broader market uptick.
  • Citing the shutdown of the U.S. government shutdown, the Justice Department requested a stay of proceedings in its legal fight with US Airways Group (LCC) and American Airlines parent AMR Corp. over the carriers' proposed merger. "Absent an appropriation, the Department of Justice attorneys and employees are generally prohibited from working, even on a voluntary basis," the agency said in a motion.
What to Watch Wednesday:
  • Monsanto (MON) reports third-quarter financial results before U.S. stock markets open.
  • Payroll-processor Automatic Data Processing (ADP) releases its survey of private-sector hiring for September at 8:15 a.m. Eastern time.
  • Federal Reserve Chairman Ben Bernanke speaks in St. Louis at 3 p.m.
-Compiled from staff and wire reports.

If You Only Know 5 Things About Investing, Make It These
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Closing Bell: Markets Shake Off Washington Shutdown, End Day Higher

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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