It was a big round-number day for the stock market.
The Standard & Poor’s 500 index closed a hair above 2,000 points Tuesday, 16 years after it closed above 1,000 points for the first time.
The milestone added to the market’s gains from the day before and extended the stock index’s record-shattering run this year.
The S&P 500 index, a widely followed barometer of the stock market, has closed at a new high 30 times this year. By this time last year, it had done so 25 times.
The index briefly rose past 2,000 on Monday, but closed just below that level. It still set a record-high close in the process.
“There’s perhaps a small psychological boost when you get over such a significant price level,” said Cameron Hinds, regional chief investment officer at Wells Fargo Private Bank.
U.S. stocks, in the midst of a five-year rally, have surged in the final weeks of the summer after dipping earlier this month on concerns about geopolitical tensions in Russia and the Middle East.
The latest string of shattered market benchmarks comes as investors cheered new indications that the economy is strengthening, setting the stage for stronger company earnings.
Major U.S. indexes began in positive territory in premarket trading Tuesday. That trend held as investors began to digest the latest economic reports.
The Conference Board said Tuesday that its consumer confidence index rose this month to the highest point in nearly seven years. A separate report showed that orders of durable manufactured goods surged by a record 22.6 percent in July, thanks to a jump in aircraft sales. A third report showed U.S. home prices rose in June, although at a slower pace.
Stocks opened slightly higher and remained in the green the rest of the day. The S&P crossed above 2,000 points early on, and hovered at or above the mark as it approached the close of regular trading.
Moments before the close it dipped below 2,000, then inched up just above.
The S&P 500 rose 2.10 points, or 0.1 percent, to end at 2,000.02. Seven of the 10 sectors in the S&P 500 index gained, led by energy stocks. Utilities declined the most.
The Dow Jones industrial average rose 29.83 points, or 0.2 percent, to 17,106.70. The Nasdaq composite gained 13.29 points, or 0.3 percent, to 4,570.64.
The major U.S. indexes are riding a three-week streak of weekly gains and are up for the year.
The string of record highs this year isn’t unusual when a market is recovering from a downturn, said Kate Warne, an investment strategist at Edward Jones.
In the past, once stocks have hit a new high after a downturn, they have continued higher for about two years, on average, she said. The first time the S&P 500 hit a new high after the financial crisis was March 2013. So this year’s record run is still within the average range.
“Markets don’t climb sharply. They tend to climb slowly, and that’s probably good news for a continued climb in the future,” Warne said.
The Dow also has put up some big numbers this year, notching 15 new closing highs. That trails the 30 it racked up by this time a year ago.
While the market is setting records, many stock watchers believe equities remain fairly valued, though not cheap.
The S&P 500 is trading around 16 times its forward-operating earnings, or over the next 12 months. The historical average on that measure is about 15 times.
“That says stocks are no longer cheap, but we also don’t think they’re expensive,” Warne said. “Historically, when the price-earnings ratio has been in that range, returns over the next year have been around 7 percent. That’s not bad.”
Bond prices fell. The yield on the 10-year Treasury note rose to 2.39 percent. U.S. crude for October delivery rose 51 cents to $93.86 a barrel. In metals trading, gold rose $6.30 to $1,285.20 an ounce, silver rose three cents to $19.39 an ounce and copper fell three cents to $3.19 a pound.
Among the stocks making big moves Tuesday:
— Amazon rose 2.3 percent after saying that it would buy video streaming company Twitch for $970 million. The stock climbed $7.81 to $341.83.
— Best Buy fell $2.19, or 6.8 percent, to $29.80 after the electronics retailer reported that its fiscal second-quarter net income plunged 45 percent as sales weakened.
— Orbitz fell 4.6 percent after American Airlines and US Airways disclosed they are pulling flight listings from the site because they have not been able to reach agreement on a long-term contract with the travel booking website operator. Orbitz shed 39 cents to $8.04.
New research says there is such a thing as a hot hand in basketball — like momentum in investing. Trouble is, hot hands lead to overconfidence, which leads to cold spells.
A couple of winters ago, Larry Summers gave a 30-minute talk to the Harvard’s men’s basketball team over pizza. During the peroration, per Adam Davidson in the New York Times, the former Treasury Secretary and Harvard president engaged in a bit of Socratic dialogue.
He asked the students if they thought a player could have a “hot hand” and go on a streak in which he made shot after shot after shot? All the players nodded uniformly. Summers paused, relishing the moment.
“The answer is no,” he said. “People apply patterns to random data.”
In this case, Summers may be wrong.
A new study by three Harvard grads — using data based on tracking cameras in 15 arenas that captured 83,000 shot attempts in the 2012-13 NBA season — found that “players who are outperforming (i.e. are ‘hot’) are more likely to make their next shot if we control for the difficulty of that shot.”
When you account for the difficulty of the shot, the authors discovered “a small yet significant hot hand effect.” To put a number on it, a player’s chance of making his next shot increases by 1.2% for each prior shot he made.
While your basketball skills may never carry you to the NBA, there is a lesson to be learned from the paper’s findings.
And it has to do with how you invest.
The study’s authors concluded the following: “Players who perceive themselves to be hot based on previous shot outcomes shoot from significantly further away, face tighter defense, are more likely to take their team’s subsequent shot, and take more difficult shots.”
This basically means when someone makes certain shots (think three-pointers) at a higher percentage than they normally do, the opposing defense reacts by guarding the player more closely. And as defenders start paying more attention to the shooter, he has to take shots from longer range, which are inherently more difficult.
What does this have to do with your portfolio?
Well, consider what’s going on. A player makes a few shots and gets “hot.” He’s in the zone, so he starts growing overconfident. Not only does he start to take more shots, but he starts taking increasingly difficult shots.
While he may be more likely to make those difficult shots at the outset since he’s on a roll, the more difficult shots come with a lower percentage of accuracy. Which means he will eventually start to miss more and cool down. In other words, his overconfidence leads him to take shots that eventually take him “out of the zone.”
This is a lot like momentum investing.
Momentum is a real force in the markets. History, for instance, shows that investors — at least in the short run — are much better off riding last year’s winners than the laggards, says Sam Stovall, managing director for U.S. equity strategy at S&P Capital IQ.
So investors who ride the market’s momentum invest in a winning stock or sector. Those investments rise in value. This trend repeats a few times and before long investors believe their skills as a trader are leading to the gains, rather than the momentum effect. Before long, these investors are trading more frequently to capitalize on their “hot hands.” But this has the effect of racking up trading costs and mistakes, which are a headwind to investors that eventually cools them down.
This doesn’t mean you should eschew momentum altogether. As MONEY’s Paul Lim noted in his March 2014 article, “A decent body of research suggests that entire asset classes that shine in one year have a better-than-average chance of outperforming in the next.”
The trick is to find a way to ride the hot hand without taking increasingly inefficient shots.
One idea is to minimize your trading costs by limiting your trading to just once a year. According to researchers at the asset-management firm Leuthold Group, a time-tested way to do this is to buy last year’s second-best performing asset class and hold that for a year (last year’s second-best asset class was large, U.S. stocks). Then repeat the process the following year. Historically, such a strategy returned five points more annually than the S&P 500, while experiencing only slightly more volatility. (Of course, you shouldn’t tilt your entire portfolio toward momentum sectors. Think 10%.)
By incorporating a little bit of the “hot hand” into your investing strategy, you should be able to book slightly higher returns. And you don’t even have to go to the gym.
It's been a decade since Google went public. Here are 10 ways the company has transformed the market—and our lives— since.
Back in 2004, investors weren’t entirely sure what to make of Google, and skeptics abounded. Fast-forward to today, when we can look back at how far the company has come, in ways that inspire both awe and concern. Below are 10 examples of its influence.
1. It has changed our language. Despite Microsoft’s best efforts, there’s a reason “Bing” never caught on as a verb, let alone as a beleaguered anthropomorphic meme. The phrase “to Google” is so popular that the company is actually worried about losing trademark rights if the term becomes generic, like “escalator” and “zipper,” which were once trademarked.
2. It has changed our brains. Recent research has confirmed suspicions that 24/7 access to (near) limitless information is not only bad for human discourse—it’s also making us worse at remembering things, regardless of whether we try. And even if we aren’t conscious of it, our brains are primed to think about the Internet as soon as we start trying to recall the answer to a tough trivia question. Essentially, Google has become our collective mental crutch.
3. It set the stage for Facebook and Twitter’s sky-high valuations. Yes, lofty valuations based on mere speculation were also common back in the dot-com fervor of the ’90s, says Ed Crotty, chief investment officer for Davidson Investment Advisors. But Google broke new ground by proving that even just the potential for a huge audience could pay off in a big way.
“In the early days, when people were thinking in terms of web portals, the barriers to entry didn’t seem high for search,” Crotty says. That meant Google’s competitive advantage wasn’t clear. But “the tipping point was when Google was able to scale up their audience enough to attract ad agencies, and then further improve their algorithms, since those get better with scale. That’s partly why you see tech companies now willing to forgo profits for a period of time in order to build an audience.” And also why investors are willing to throw money their way.
4. It has taken over our cell phones. Since the first Android phone was sold in 2008, Google’s mobile operating system has bulldozed the competition. Today it claims nearly 85% of market share, nearly doubling its hold over the last three years. Next stop, self-driving cars?
5. It has transformed the way we use e-mail. Gmail was invented a decade ago, before bottomless inboxes were a sine qua non. It’s hard even to remember those dark ages when storage space was sacred—and deleting emails was as tedious-but-necessary as flossing. Today our accounts serve as mausoleums, housing long-forgotten files, links, and even whole relationships. Google itself has touted alternative uses for Gmail, such as setting up a virtual time capsule for your newborn—though in practice accounts can’t be owned by anyone under 13. But even that last point is about to change.
6. It’s changed how we collaborate. Back in 2006, Google acquired the company behind an online word processor named Writely. With that bet, Google created a world where it’s taken for granted that people can collaborate on virtually any type of document, whether for work, play, or (literally) revolution.
7. It has allowed us to travel the globe from our desks. Yes, MapQuest was popular first. But Google Maps (and Earth) has become much more than a tool for measuring travel routes and times. Since Google Street View came onto the scene in 2007, it’s been possible to “visit” distant destinations, give friends a virtual tour of your hometown, plan ahead of trips, and waste even more time on the Internet. Of course, the more popular a tool, the more useful it is to those who’d like to spy on us.
8. It has influenced the news we read. Ranking high in Google search results is serious business and can have a profound effect on the success of companies, media outlets, and even politicians. When I just Googled “how SEO affects journalism,” this link was at the top of my search results. How is that significant? Well, for one, that story itself has been so successfully search engine optimized that it still tops the list despite being four years old.
But most importantly, many of the concerns raised in the piece have not gone away—such as the pressure to “file some pithy blog post about the hot topic of the moment” at the expense of covering stories that would be prioritized based on traditional measures of newsworthiness. What that means for you, the reader: more headlines like this and this.
9. It has turned users into commodities. We all love free stuff, but it’s easy to forget that services offered by companies like Google and Facebook aren’t truly “free,” as data expert Bruce Schneier has pointed out. Remember that all of your data (across ALL of the services you use, and that includes Calendar, Maps, and so on) is a valuable good that Google is packaging and selling to its real customers—advertisers.
10. It’s changed how everyone else sees YOU. Unlike your Facebook profile, the links that turn up when potential employers (or love interests) Google you can be near-impossible to erase. Perhaps unsurprisingly, Google uses the fear of embarrassing search results to encourage people to manage their image through Google+ profiles.
Reports say the Ukrainian military destroyed Russian vehicles
The Dow Jones Industrial Average dropped more than 100 points Friday on reports that the Ukrainian military destroyed Russian military vehicles that entered into Ukraine. Investors are concerned about further escalation.
Russian military vehicles carrying aid entered Ukraine over night following a days-long standoff over whether the more than 200 vehicles could enter the country, CNBC reports. The Ukrainian military destroyed the vehicles as they crossed, Ukrainian President Petro Poroshenko’s told British Prime Minister David Cameron by phone.
“The President informed that the given information was trustworthy and confirmed because the majority of that machines had been eliminated by the Ukrainian artillery at night,” read a statement on Poroshenko’s website.
The decline around noon Eastern time erased earlier Friday morning gains on news that Coca-Cola had bought a $2 billion stake in Monster. Markets around the world declined similarly.
As the economy keeps growing, the market will sour on the sunny, putting a damper on stocks.
A version of this article ran in the August 2014 issue of MONEY magazine.
The Dow Jones Industrial Average lost another 140 points on Tuesday, wiping out Monday’s modest bounce-back from what had been the worst weekly decline in over six months. All told, the index has fallen 4.1% since it hit a record high on July 16.
This happened despite some pretty good (though not really good) economic data, like last week’s Labor Department report that the economy added 209,000 new jobs in July.
So what’s going on? In short, I suspect the bull market has entered its next—and perhaps final—phase.
Why a change of heart is due. While equities should reflect the health of the economy, there comes a time in every business cycle in which earnings growth—the real driver of stock prices—peaks. S&P 500 profit margins are already at all-time highs. A better job market shows the economy is improving now, but it also hints that wages could rise down the road, weighing on future profits.
At the same time, better-than-expected news may lead the Federal Reserve to stop trying to stimulate economic activity. And that’s a big concern in the final throes of a bull when investors are trying to ride that last bit of tailwind provided by cheap credit.
What works during the bull’s final stage. As risk taking and speculation fall out of favor, shares of big, dominant companies tend to grow in popularity. Today, these big blue chips have another advantage: They’re cheap relative to smaller-company stocks, says Jack Ablin, chief investment officer for BMO Private Bank.
Indeed, the price/earnings ratio for stocks in the Vanguard Mega Cap ETF (MGC), which owns only the biggest blue chips in the U.S., is 16.8. By comparison, stocks in the Vanguard Small-Cap ETF sport an average P/E more than 15% higher.
Where to seek shelter. The natural inclination at this stage is to hide in stable but slow-growing sectors like utilities, since these stocks pay dividends and are likely to fall less in a market downturn.
However, economically sensitive sectors such as energy and tech perform surprisingly well in the last 12 months of a bull, according to Ned Davis Research. So take refuge in a fund like Fidelity Large Cap Stock (FLCSX), which has big stakes in both sectors and has beaten at least 90% of its peers over the past three, five, and 10 years.
While job growth was tepid in July, this was exactly what the markets needed to reverse Thursday's 317-point decline, as pressure on the Federal Reserve to raise rates subsides.
Yet what seemed like disappointing results turned out to be exactly what Wall Street needed.
On the one hand, the economy still managed to produce more than 200,000 jobs in July, which marked the sixth consecutive month in which job creation topped that level. That hasn’t been seen since the late 1990s. “July’s payrolls report helps to confirm the sustainability of the strongest labor market expansion since 1997,” said Guy LeBas, chief fixed income strategist for Janney Montgomery Scott.
On the other hand, the labor market was just tepid enough to cool at least some of the hot debate about how the Federal Reserve needs to stop coddling an economy that’s starting to sizzle and hike rates soon.
Immediately after the jobs report was released Friday morning, investors took a deep breath and calmed down following Thursday’s 317-point drop in the Dow Jones Industrial Average.
Though it seemed as if the markets were headed for another triple-digit down day based on sentiment before the opening bell, the Dow and S&P 500 were relatively flat in early morning trading. By around 11:30 am, the Dow had fallen by around 50 points, but that was pretty much all the bulls could hope for:
The real question is how long will the bears be kept at bay? A week from now, the government is set to release another batch of data detailing worker productivity and labor costs. And if there’s any whiff of inflation in those figures, the bears are likely to awake once more.
Facebook's stock doubled its IPO price by midday Thursday
Facebook suffered a cruel summer back in 2012. The social network raised its IPO price just before going public in May 2012, but technical glitches during early trading caused mass investor confusion. Nasdaq eventually paid a $10 million fine over the debacle, and Wall Street showed no mercy to the social network in the ensuing months. Facebook’s stock cratered, diving from $38 to below $18 before the following autumn.
Two years later, the sun’s shining bright on the tech giant. Facebook beat analysts’ expectations yet again in its latest quarterly earnings report, generating revenue of $2.9 billion and earnings per share of 42 cents. That sent the company’s stock soaring above $76 during midday trading Thursday, doubling its IPO price of $38. That’s also more than quadruple the social network’s all-time low close of $17.73.
Facebook’s massive turnaround has everything to do with mobile. When the company went public, its revenue was almost completely tied to desktop ads–exactly the kind of business investors in the mobile era don’t like. With more than half a billion people already accessing Facebook on mobile, the company had to prove that it could successfully transition its business. CEO Mark Zuckerberg set a laser-like focus on mobile strategy, and he forced his executive clique to do the same.
The dedication has paid off. Facebook now generates more than two-thirds of its total ad revenue on mobile and has more than a billion mobile monthly active users. Overall ad prices jumped 123 percent year-over-year, partially because mobile ads placed directly in users’ News Feeds are more valuable than ads on the right rail of the site served to desktop users.
But what really has Wall Street salivating is the fact that Facebook has plenty of mobile monetization moves left to make. New auto-playing video ads in users’ News Feeds could help the company lure marketers from television. Instagram introduced ads last year that are being positioned as an attractive option for brand marketers. The company is also likely to figure out ways to make money off its messaging goliaths Messenger and recently-acquired WhatsApp.
Overall, it’s clear that Facebook has solved its mobile conundrum, and Wall Street is rewarding it handsomely. With its share of the overall mobile advertising market quickly increasing, the company may soon to be able to challenge Google to be at the top of the totem pole of mobile.
The media mogul has a habit of buying at the top of the market.
What do Rupert Murdoch’s $80 billion bid for Time Warner and Fed chair Janet Yellen’s mid-year report to Congress yesterday have in common? Both may well be signals of a market top.
Let’s start with the news Wednesday: Murdoch has a track record of making bids that mark the end of bull runs. As Peter Atwater, a behavioral economist who runs the firm Financial Insyghts, pointed out to me, Murdoch’s $5.3 billion acquisition of Chris Craft in 2000, his $5.6 billion acquisition of Dow Jones in 2007, and his $12 billion bid for the portion of BSkyB that he didn’t own back in 2011 all coincided with market peaks. Shortly after all these deals, stocks fell.
Likewise, Janet Yellen’s speech Tuesday on the state of the U.S. economy, in which she said she thought technology stocks (including biotech and social media in particular) were overvalued, was an important signal that valuations are stretched, and we may be in for a fall. Yellen tends to worry less about bubbles than some other economists, so when she starts to fret — and especially when she says so publicly — that’s telling.
It’s no wonder that all this is happening now. With more than $4 trillion of Fed money sloshing around in the markets, and jobs numbers looking better, there’s a vigorous central banker debate going on about how soon to raise interest rates (which inevitably dampens market sentiment). Likewise, it’s worth noting that the last five major merger manias in financial history happened at the peak of markets, and ended with a big drop in equities. That happens not only because companies have a lot of money to play with at the top of a market, but also because they have in many cases exhausted growth strategies, and mergers are an easy way to get a further quick-hit boost in stocks (see my column on that topic here). Mergers are often presented as the beginning of a corporate growth streak — more often than not, they signal the end.
The Crumbs cupcake shop in my neighborhood just shut down. It’s a sad day for the entire sugar industry: Crumbs, a once-growing collection of shops with visions of becoming a national bakery chain, abruptly folded its 65-store operation in 12 states, putting hundreds of people out of work. The company had been delisted from NASDAQ last week, its stock trading for pennies from a high near $14. Sales were falling, Crumbs was losing money and unlikely to become profitable anytime soon. As of its last quarterly filing, the company had just $300,000 in cash on hand, and its liabilities included $244,000 in gift cards outstanding. Hope you didn’t own any of them. Crumbs lost $5 million in its last quarter.
Was Crumbs a victim of Americans turning toward eating healthier, especially among children, as the First Lady has encouraged? Fat chance. We are as plump and pleased as ever, and our appetite for donuts, cronuts, deep-fried Oreos and Baconators will not be reposing anytime soon. Long live junk food, if maybe not us.
But you could see this one crumbing long before it happened. Crumbs made good cupcakes—one of those sweet bombs could keep an 8-year old wired for about three days—but its failure isn’t so much about the product so much as the way Wall Street works to bake new companies. The recipe almost guarantees trouble in the future for many firms. Crumbs joins the long list of once hot food franchises that couldn’t resist the smell of growth and ultimately had difficulty managing it: David’s Cookies, Krispy Kreme, Einstein Bagels, World Coffee, just to name a few. They can survive, but generally after massive restructuring. Crumbs ran out of time and money.
The pattern is similar: a good product or idea becomes increasingly popular, and investors get moon-eyed about the prospects. At the same time, other operators and investors will swear to you that there’s plenty of room for more than one brand—or that if there isn’t much room, their concept is superior.
In the mid-90s, it was the humble bagel’s turn for the national spotlight. The players included Bruegger’s Bagel Bakery, Einstein Bros. Bagels, Chesapeake Bagel Bakery, Manhattan Bagel, Noah’s New York Bagels, Big Apple Bagels and the Great American Bagel among others. Several of them went public, which funded overexpansion. They dreamed big. “What happened to the pizza in the ’40s and ’50s is happening to the bagel today,” said the ceo of Manhattan Bagel at the time. “Soon there will be bagel shops on every street corner.” Except in Manhattan, where there are no Manhattan Bagel shops. Einstein, Noah, Chesapeake and Manhattan would eventually become part of one company, as the craze subsided and the industry consolidated. Then it was doughnuts. Krispy Kreme also got creamed by massive overexpansion funded by its very popular IPO. Even in the U.S., we can only eat so many doughnuts.
Cupcakes are now repeating the pattern, with predictable results. In the cupcake game, Crumbs competitors include Magnolia Bakery, Sprinkles, and any number of hipster-preneurs in major cities not to mention the likes of Duncan Donuts and Starbucks, which flanked the cupcake shops with offerings of their own. If cupcakes were that hard to make, your mom wouldn’t have churned them out on demand.
Why isn’t there more caution? Because that’s not Wall Street’s real concern. The investment industry’s mission is to throw money at enough startups—from cupcakes to social media—and hope to land on a winner. Failure is built in, the only question being who is going to take the losses. A lot of time it’s overeager shareholders who pile in these stocks because all they see is unlimited growth. In food, the best case scenario is Starbucks, whose original store still operates on Pike Street in Seattle along with thousands of others around the world. An IPO allowed Starbucks to enjoy rapid growth and made a lot of investors rich. But part of Starbucks strategy was to be capitalized enough to blow other rivals out of the water by grabbing the best locations. That left everyone else to scramble to remain competitive—and why there’s really no No. 2 in premium coffee.
Fortunately, the U.S. is not going to run out of cupcakes anytime soon. This is basically a mom and pop business that is still best run by mom and pop. Cupcakes may have had their run for now, but investors are always going to be hungry to find the next new food style to fund. And grilled cheese is waiting in the (chicken) wings.