Closing Bell: Stocks Add to Tuesday's Gains on Tepid GDP Data

gross domestic product
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Stocks advanced for a second straight day despite data showing the economy grew at a slower pace during the first quarter than previously thought. The Commerce Department reported Wednesday that gross domestic product expanded at an annual rate of 1.8 percent in the first quarter, down from a previously reported 2.4 percent increase.

Still, the the Dow industrials (^DJI) added 150 points, its second day of triple-digit gains, to close at 14,910. The S&P 500 (^GPSC) added nearly 16 points to end at 1,604, and the Nasdaq (^IXIC) jumped 28 to 3,376.

Investors may have decided that the slower-growing economy will persuade the Federal Reserve to delay any plans to pull back on stimulus measures, the Associated Press reported. Those measures, which include buying bonds, are meant to prop up the economy by keeping interest rates low and encouraging people to buy stocks.

The weaker-than-expected growth in GDP sent bonds lower. The yield on the 10-year Treasury note, a benchmark for many kinds of loans, fell to 2.55 percent from 2.61 percent late Tuesday. The yield had risen sharply in recent weeks in reaction to comments by the Federal Reserve that it may soon start to trim back its bond-buying program, as well as positive economic news including increased home sales (driven by eager home buyers racing to lock in low mortgage rates).

Among companies making big moves in trading Wednesday:
  • Shares of Sprint Nextel (S) rose more than 1.5 percent following news that the company's shareholders had agreed to a $21.6 billion takeover by SoftBank, a Japanese mobile carrier. Dish Network (DISH) recently dropped its offer to buy Sprint after SoftBank increased its bid price, and may set its sights on smaller T-Mobile USA (TMUS), which, as the TheStreet.com notes, is the last remaining U.S. nationwide carrier.
  • Fertilizer maker Mosaic Co. (MOS) fell after Citigroup (C) analysts downgraded the stock to "neutral" from "buy," citing a hold-up in the company's stock buybacks and questions over demand for fertilizer. The stock fell $1.01, or 1.8 percent, to $54.90.
  • Gun-manufacturer Smith & Wesson Holding (SWHC) fell, even after reporting that its profits doubled, as quarterly revenue missed analyst forecasts. The stock lost 21 cents, or 2.1 percent, to $9.78.
  • General Mills (GIS), whose products include Cheerios and Nature Valley granola bars, fell after reporting earnings predictions that came in slightly below analyst estimates. The stock declined by 24 cents, or 0.5 percent, to $48.09.
What to Watch Thursday:

ConAgra Foods (CAG), Nike (NKE) and Winnebago Industries (WGO) are scheduled to report earnings Thursday. Nike's results are due after market close. Analysts expect the maker of athletic apparel to report per-share earnings of 75 cents on revenue of $6.64 billion, based on consensus estimates.

On the economic calendar, the Labor Department reports weekly jobless claims, and the Department of Commerce issues latest data on personal income and spending, both at 8:30 a.m. ET. At 10 a.m., watch for pending home sales for May from the National Association of Realtors, and at 11 a.m., the Kansas City Fed releases its latest manufacturing index.

Compiled from staff and wire reports.

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Closing Bell: Stocks Add to Tuesday's Gains on Tepid GDP Data

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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Markets

NASDAQ 6,459.29 4.65 0.07%
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HANG SENG 28,051.41 -108.36 -0.38%
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