The crisis in Washington has been averted, at least for another few months, so investors can turn their attention back to the Federal Reserve, economic growth and corporate earnings.
Who are the winners and losers in this dragged out Washington saga? Texas Sen. Ted Cruz, House Speaker John Boehner and other hardline conservatives are facing some heat right now. And it's hard to find many winners -- even though investors may have escaped unscathed.
The Dow Jones industrial average (^DJI) soared 205 points Wednesday, as the Senate's 11th hour agreement triggered a relief rally. The Nasdaq composite index (^IXIC) jumped 45 points and the Standard & Poor's 500 index (^GPSC) moved back within 4 points of the record high set last month.
Standard & Poor's says the government shutdown will cut 0.6 percent from the nation's GDP in the fourth quarter. That's about $24 billion.
This is a big day on the earnings calendar. This morning we're getting upbeat reports from Verizon (VZ), Goldman Sachs (GS) and United Healthcare (UNH). After the closing bell, Google (GOOG) takes center stage.
IBM (IBM) shares are likely to take a big hit after Big Blue reported that sales fell well short of expectations, partly because of weakness in its business in China. Analysts say the prospects for a quick turnaround aren't good.
Fewer homeowners than expected have benefited from the $25 billion agreement worked out last year with five leading banks. The government monitor of the fund also says more people chose to give up their homes in short sales than the number who reduced the amount they owe on their homes.
And Facebook (FB) has some parents up in arms. The social networking company is easing its privacy rules for teenage users that will open their postings to a much wider group. Since teens don't always exercise the best judgment, the move is raising concerns that kids will become more vulnerable to bullying and to sexual predators. For Facebook, it's all about winning back teens and getting more money from advertisers. Don't be surprised to see this new policy revised.
-Produced by Drew Trachtenberg.
If You Only Know 5 Things About Investing, Make It These
Money Minute: IBM Awaits Investor Reaction; Budget Deal Reopens Gov't
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.