News from and about the Federal Reserve is likely to drive the market this week. The Fed's policy-making Open Market Committee meets on Tuesday and Wednesday. The talk on Wall Street for the past few months has been about when Fed will begin to taper its $85 billion a month bond-buying program. Analysts say a decision to taper now could extend the market's recent decline.
And this is likely to be Ben Bernanke's last meeting as Fed chairman. The Senate is scheduled to vote this week on the nomination of current Vice Chairman Janet Yellin to replace him. There's also a possibility that President Obama will shortly nominate a successor for Yellin. The leading candidate is said to be Stanley Fischer, a well-regarded former chief economist at the World Bank who recently completed an eight-year stint as head of Israel's central bank. Fischer holds dual U.S. and Israeli citizenship.
Retailers are always a bit nervous at this time of year, and following two straight weekends of snowstorms across much of the nation, everyone from mom-and-pop store owners to giant chains have to be worried. But the weather could prove to have been a boon to Internet retailers, as many holiday shoppers had nothing to do this weekend but surf the web.
Speaking of holiday gifts, UPS (UPS) says today is its busiest pick-up day of the year. About 34 million packages will be picked-up -- and most of them will be delivered Tuesday.
%VIRTUAL-article-sponsoredlinks%Right before Friday's closing bell, reports surfaced that Sprint-Nextel (S) may be preparing a bid for T-Mobile (TMUS). A deal could be worth more than $20 billion, but it could face opposition from the Justice Department. Two years ago, antitrust regulators blocked AT&T (T) from acquiring T-Mobile from Deutsche Telekom in a bid that was valued at $39 billion.
Here on Wall Street, the Dow Jones industrial average (^DJI) , the Standard & Poor's 500 index (^GPSC) and the Nasdaq composite (^IXIC) all lost more than one percent last week.
Finally, two researchers at Yale have determined that charitable contributions actually go down when charities offer gifts such as tote bags or mugs. However, they tell the Wall Street Journal that those gifts may lead to more giving and more loyalty down the road.
-Produced by Drew Trachtenberg.
If You Only Know 5 Things About Investing, Make It These
Market Minute: All Eyes on the Fed this Week with Taper Talk in the Air
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.
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.