Closing Bell: Stocks Enter Negative Territory for June; Eyes on the Fed

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Stocks end a difficult week with losses, as all eyes turn toward the Fed.

The Dow Industrials sank 105 points, while the Nasdaq dropped 21. And a day after its second-biggest advance of the year, the S&P 500 lost 9 points. All three major averages are now in negative territory for the month.

June is proving a challenge for consumers too. According to Thomson Reuters and the University of Michigan, sentiment dipped from a six-year high in May. Economists predicted that the gauge would hold steady.

Meanwhile, prices at the wholesale level rose more than expected last month, bouncing back from a big decline in April. The increase was mainly due to higher gasoline prices; excluding energy and food costs, the core rate ticked up just slightly, indicating that inflation pressures remain in check.

WASHINGTON, DC - MAY 22: Federal Reserve Board Chairman Ben Bernanke leaves after he testified at a hearing before the Joint Economic Committee May 22, 2013 on Capitol Hill in Washington, DC. Bernanke was on the Hill to give his views of the current economic outlook. (Photo by Alex Wong/Getty Images)
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The Federal Reserve will take all the data into consideration next week, when it meets to set monetary policy. Investors will be watching closely for any more hints about when Ben Bernanke and company may start winding down their quantitative easing program.

Policymakers may also want to consider the latest warning from the International Monetary Fund. The IMF cut its forecast for U.S. economic growth next year to 2.7 percent, saying spending cuts and higher tax rates could weigh on consumer demand.

Financial stocks were a drag on the broader market today: JPMorgan Chase and American Express were two of the biggest losers on the Dow.

But among all S&P 500 stocks, Game Stop led the way with a 4 percent gain. Investors hope the introduction of the Playstation 4 and Xbox One will boost sales for the video game retailer.

Restoration Hardware surged 16 percent, after reporting a better-than-expected profit in its latest quarter. And Groupon jumped 11.5 percent on an analyst upgrade from Deutsche Bank.

Finally, an outperform rating from Credit Suisse produced a 6-.5 percent bump for SolarCity. The news also gave Tesla shares a boost -– CEO Elon Musk is a major shareholder in the solar panel company.

12 PHOTOS
86 Percent of Americans Can't Ace This Simple Personal Finance Quiz. Can You?
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Closing Bell: Stocks Enter Negative Territory for June; Eyes on the Fed

A. More than $102

B. Exactly $102

C. Less than $102

A. More than $102

You’ll have more than $102 at the end of five years because your interest will compound over time. In other words, you earn interest on the money you save and on the interest your savings earned in prior years. Here’s how the math works. A savings account with $100 and a 2 percent annual interest rate would earn $2 in interest for an ending balance of $102 by the end of the first year. Applying the same 2 percent interest rate, the $102 would earn $2.04 in the second year for an ending balance of $104.04 at the end of that year. Continuing in this same pattern, the savings account would grow to $110.41 by the end of the fifth year.

Imagine that the interest rate on your savings account is 1 percent a year and inflation is 2 percent a year. After one year, would the money in the account buy more than it does today, exactly the same or less than today?


 

A. More

B. Less

C. Same

B. Less

The reason you have less is inflation. Inflation is the rate at which the price of goods and services rises. If the annual inflation rate is 2 percent but the savings account only earns 1 percent, the cost of goods and services has outpaced the buying power of the money in the savings account that year. Put another way, your buying power has not kept up with inflation.

True or false: A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage but the total interest over the life of the loan will be less.


 

True

False

True

Assuming the same interest rate for both loans, you will pay less in interest over the life of a 15-year loan than you would with a 30-year loan because you repay the principal at a faster rate. This also explains why the monthly payment for a 15-year loan is higher. Let’s say you get a 30-year mortgage at 6 percent on a $150,000 home. You will pay $899 a month in principal and interest charges. Over 30 years, you will pay $173,757 in interest alone. But a 15-year mortgage at the same rate will cost you less. You will pay $1,266 each month but only $77,841 in total interest—nearly $100,000 less.

A. Rise

B. Fall

C. Stay the same

D. There's no relationship to bond price and interest rates.

B. Fall

When interest rates rise, bond prices fall. And when interest rates fall, bond prices rise. This is because as interest rates go up, newer bonds come to market paying higher interest yields than older bonds already in the hands of investors, making the older bonds worth less.

True

False

False

In general, investing in a stock mutual fund is less risky than investing in a single stock because mutual funds offer a way to diversify. Diversification means spreading your risk by spreading your investments. With a single stock, all your eggs are in one basket. If the price falls when you sell, you lose money. With a mutual fund that invests in the stocks of dozens (or even hundreds) of companies, you lower the chances that a price decline for any single stock will impact your return. Diversification generally may result in a more consistent performance in different market conditions.

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