Market Minute: JPMorgan Earnings Take a Hit; Markets Root for Shutdown's End

A big sigh of relief for investors, and two banking giants post earnings. Those stories and more are what's in Friday's Market Minute.

The Dow Jones industrial average (^DJI) soared 323 points Thursday, the biggest gain this year, on signs the stalemate in Washington may be breaking apart. The Standard & Poor's 500 index (^GPSC) jumped 36 and the Nasdaq composite index (^IXIC) rose 82 points.

jpmorgan ceo jamie dimon earnings season banks
Chris Ratcliffe/Bloomberg via Getty ImagesJPMorgan Chase CEO Jamie Dimon
Earnings season is heating up. JPMorgan Chase (JPM) posted a big quarterly loss due to $9 billion in charges for legal costs and reserves. Without those items, JPMorgan's operating net easily topped Wall Street expectations. Chairman Jamie Dimon says he expects legal costs to remain volatile over the next several quarters, before stabilizing.

Wells Fargo (WFC) says its earnings rose 13 percent on lower expenses, even as its lucrative mortgage business slowed from a year ago. The results beat Wall Street estimates.

And another big bank, SunTrust Banks (STI), is taking charges totaling $1.2 billion to settle legal claims related to mortgage securities.

The supermarket chain Safeway (SWY) easily beat expectations. The company also says it plans to leave the Chicago market, where it operates 72 stores under the Dominick's brand.

Micron Technology's (MU) net fell short of expectations, but the chipmaker issued an upbeat outlook, helped by a recent acquisition.

And the retailer Gap (GPS) posted a 3 percent drop in a key measure of sales last month. Its shares are set to drop.

BP and Toyota Motor both won big victories in court. A jury found BP (BP) was negligent in allowing toxic gas to leak out from a Texas City plant in 2010. But the jury said the plaintiffs in the case weren't due any compensation. They had sought billions of dollars, but BP argued that they didn't suffer serious harm.

And a jury in California found that Toyota (TM) wasn't liable for the death of a woman killed when her Camry crashed after accelerating unexpectedly. The jury said the vehicle's design wasn't at fault. This case is considered a bellwether for other cases of unintended acceleration.

If You Only Know 5 Things About Investing, Make It These
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Market Minute: JPMorgan Earnings Take a Hit; Markets Root for Shutdown's End

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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