Stronger-than-expected housing data and positive earnings reports helped propel the equity markets higher on Friday.
The Dow closed higher by 127 points, with 27 of its 30 components advancing; the S&P 500 Index climbed 13; and the Nasdaq gained 30. Advancers led decliners by 5 to 3 on the NYSE and by 6 to 5 on the Nasdaq. The prices of Treasuries strengthened. Gold futures rose $2.70 to close at $1,231.80 an ounce. The price of crude oil slid $1.08 to settle at $81.01 a barrel.
For the week, the Dow added 2%, the S&P 500 Index increased 4%, and the Nasdaq was up 5%.
In Earnings News:
The Federal Open Market Committee (FOMC) is likely to wrap up its asset purchase program that the media has labeled QE3 (quantitative easing, part 3) at its October 29 meeting. Is this a QE cliff from which the economy will do a swan dive or a belly flop? Probably neither. The Federal Reserve (Fed) has been trimming its monthly asset purchases (the taper) from $85 billion since December 2013. Interest rates haven’t risen, financial conditions have stayed healthy, and the outlook hasn’t deteriorated.
QE3 was implemented in September 2012 and expanded in December 2012. At the time, the outlook was blurry, with the looming fiscal cliff of spending cuts and tax increases set to hit as the calendar turned from 2012 to 2013. Minutes of the FOMC meetings showed Fed officials wanted to put downward pressure on interest rates, support mortgage markets, and make financial conditions more accommodative. Real business expenditures on equipment and software appeared to be decelerating. The unemployment rate hadn’t made much progress for six months. Consumer spending had been flat. Federal spending appeared to be set to fall due to the sequester. These were not conditions conducive to growth, and Fed officials probably thought they needed to do something.
Stocks rallied on upbeat earnings, led by blue chips Caterpillar and 3M, as well as several U.S. airlines that advanced on strong profits and lower fuel prices. The Dow rose 216 points, with 26 of its 30 components advancing; the S&P 500 Index gained 23 points; and the Nasdaq added 69. Advancers led decliners by three to one on the NYSE and the Nasdaq. The prices of Treasuries weakened. Gold futures dropped $16.40 to close at $1,229.10 an ounce. The price of crude oil rose $1.57 to settle at $82.09 a barrel.
In earnings news:
- Caterpillar Inc.’s shares (CAT) rose 4.97%, after the company raised its 2014 outlook and reported third-quarter earnings of $1 billion, or $1.63 a share, up from $946 million, or $1.45 a share, a year ago. Profits beat estimates, as did revenue, which rose 1% to $13.5 billion, helped by the firm’s construction machinery unit, but hurt by mining operations.
- Comcast Corp. posted a 50% rise in third-quarter net income to $2.6 billion, on revenue of $16.8 billion, up 4%. Earnings beat estimates, at an adjusted 73 cents a share, led by high-speed internet subscriptions and Comcast subsidiary NBC television network. The company’s shares (CMCSA) gained 3.36%.
- General Motors Co. posted a near 100% jump in third-quarter net income to $1.4 billion from a year ago, despite 75 recalls that cost $2.8 billion. Driven by U.S. truck and SUV sales, revenue rose 2% to $39.3 billion, as did the automaker’s North American operating margin, which widened to 9.5% from 9.2%, year-over-year. GM’s shares (GM) fell 1.21%.
- JetBlue Airways Corp.’s third-quarter earnings missed forecasts, despite posting an 11% jump in net income to $79 million. Revenue rose 6% to $1.5 billion, on fuller flight bookings. Operating expenses also rose, up 5.7% or $75 million, from the prior year. The airline’s shares (JBLU) declined 2.86%.
In other business news:
Families, and financial advisors who help them, benefit from taking time to discuss their financial future together. Wayne Badorf, CFP®, CFS®, head of intermediary sales for Wells Fargo Asset Management and the firm’s resident expert on practice management and the topic of money and generations, explains in this excerpt of the On the Trading DeskSM podcast from Tuesday, October 21, 2014. Mr. Badorf is a former financial advisor, which is why he enjoys coaching advisors on running their businesses. Wayne is also a husband, father of three children, and a Gen-Xer.
Listen to the full interview.
You have this idea about how advisors should call family meetings. What is that all about?
In its essence, the idea is that an advisor is able to connect with that next generation, typically the children of a client, so they can form relationships and work with them as assets tend to pass from one generation to the next.
Why that is so important? Why should a family say, “We’ll do that”?
First, I think when parents or older generations are creating wealth; they are often creating wealth to provide opportunities. That’s something they value. When they have this meeting, values are instilled behind those assets, which may be either gifted or inherited. It results in careful consideration of what it took to create that wealth and understanding its potential down the road. Second, I think a family meeting is a great way for families to rediscover who they are. I mean, just think about the rich culture that exists in every single family and their history—by understanding that we make much more meaningful decisions with our assets going forward.
Let’s explore what this family meeting looks like.
Let’s first start with what it is and then what it isn’t. It is a chance for the advisor to connect with the next generation and to join them together for a conversation. What it’s not is a meeting where the financial statements are brought out on the table and the advisor simply walks through the numbers with both the parents and the children.
Consumer inflation stayed tame in September, while shares of several big companies—like Boeing and Biogen—sold off despite releasing earnings reports that, for the most part, beat expectations. The major indexes started modestly higher but reversed course in afternoon trading, with weakness in the industrials and energy sectors.
The Dow fell 153 points, with 24 of its 30 components retreating; the S&P 500 Index lost 14; and the Nasdaq dropped 36. Decliners led advancers by 9 to 4 on the NYSE and 3 to 1 on the Nasdaq. The prices of Treasuries weakened. Gold futures dropped $6.20 to close at $1,245.50 an ounce, and the price of crude oil sank $1.97 to settle at $80.52 a barrel, the lowest closing settlement since July 2012, in large part due to a report that showed a larger-than-expected increase in crude oil stockpiles.
In earnings news:
Sharp market moves, like what we experienced mid-October, concern investors and leave them worried: Has this bull of a market tired out? It’s more important to understand the distinction between bear markets and corrections. Here to help is John Manley, chief equity strategist with Wells Fargo Funds Management, LLC.
Listen to the podcast.
The Consumer Price Index (CPI) increased 0.1% in September, or 1.7% year over year. Energy costs declined, but those declines were offset by increases in housing and food costs. For October, CPI growth could tip negative with the recent deeper decline in energy prices, but that deflation would likely be transitory.
Housing costs have been increasing faster than most other components of the CPI. Durable-goods prices (items expected to last three years or longer) have dropped 1.5% over the past 12 months, while nondurable-goods’ prices have increased 1.0%. Services prices have gone up 2.5%. Generally, inflation is progressing at a slow pace, but that masks a lot of variation in prices. High variation in prices can be as disruptive as higher inflation as relative prices shift consumer spending around quite a bit. This can create a challenging environment for retailers that incur costs in changing prices and shifting inventories to accommodate changes in consumer spending.
Real average hourly earnings fell 0.2% from August to September. Compared with September 2013, real average hourly earnings are up 0.3% and real weekly earnings are up 0.6%. It’s not a great environment for boosting consumer spending, but it’s a good enough environment to keep growth chugging along.
Stocks rallied on Apple’s positive earnings, as well as encouraging home sales data and reports that the European Central Bank is considering buying corporate bonds to stimulate regional growth. The Dow climbed 215 points, with 27 of its 30 components advancing; the S&P 500 Index rose 37 points; and the Nasdaq gained 103. Advancers led decliners by nine to two on the NYSE and by three to one on the Nasdaq. The prices of Treasuries weakened. Gold futures rose $7.00 to close at $1,251.70 an ounce. The price of crude oil increased by 58 cents to settle at $82.49 a barrel.
In earnings news:
A family meeting regarding personal finances, led by a financial advisor, helps future generations learn the value of a dollar—in the context of family values. Here to explain is Wayne Badorf, CFP®, CFS®, head of Intermediary Sales with Wells Fargo Asset Management.
Listen to the podcast.
Today’s post is a joint collaboration between John Manley, CFA, and Dr. Brian Jacobsen, CFA, CFP®.
- We see the recent bout of volatility as a normal part of investing.
- A historical look at corrections shows that they do not all signify the start of a bear market. By the same token, not every decline is a correction.
- From our perspective, the upside looks more attractive than the downside looks ugly.
People like to pretend investing is a science. There is, indeed, a quantitative aspect to investing, with present-value calculations and the like, but most of investing is storytelling and understanding the psychology of crowds. You can push the psychology part a bit too far, though, labeling markets as irrational. Markets aren’t irrational—investors are. Besides, what’s more irrational, a market-determined price or insisting that a model of prices (say, the cyclically adjusted price/earnings model) is correct when the market regularly disagrees with the model? Prices are what they are, and you may as well embrace reality rather than wish it away.
Markets are just places—virtual or real—where prices are set. Lots of things, perceptions and misperceptions alike, can drive market prices to different levels. To further perpetuate the myth that markets are like machines and prices are set mechanically, those in the investment community also like to try to create arbitrary definitions of events: corrections, bear markets, golden crosses, and death rays (maybe we made that last one up). A stock market correction is, by most people’s account, a peak-to-trough decline of 10%. A bear market is a peak-to-trough decline of 20%. We’d argue that duration also matters, not just magnitude. A rapid decline and recovery is very different than a prolonged period of time when prices decline. One you can just ride through and ignore, while the other requires you to reassess your portfolio strategy. Of course, even these definitions aren’t really all that great. Should you measure the prices as of the end of day, as of some other point in the day, or some average? Thinking about how arbitrary and unscientific things are in investing is somewhat distracting, however. Ultimately, we need to decide, what should we do? At some point, money must be invested and action must be taken.