foxex: R.I.P. Jack Bogle

The Market Sum | INVESTOPEDIA

Insight after the bell

By Caleb Silver, Editor in Chief

Wednesday's Headlines

1. Legendary Investor Jack Bogle Passes Away at 89

Markets Close

Dow
24,207.16 0.59%

S&P
2,616.10 +0.22%

Nasdaq
7,034.69 +0.15%

VIX
19.04 +2.37%

INV Anxiety Index
101.76 Neutral

US 10-Yr Yield
2.731 +0.74%

(John) Jack Bogle, the legendary investor, founder of the Vanguard Group and the creator of the Index fund, passed away today. He was 89 years old. No one had a bigger impact on mutual funds and the way we invest today than Bogle, in my opinion. He was always on the investors' side and railed against high fees and other hidden tricks in the investing industry. He was an absolute gentleman and a true educator for all investors.

This profile of him doesn't come close to doing him the justice he deserves, but if you don't know Jack, read this and watch the video we did with him in 2017.

Who is John Bogle?

Markets Today

Markets rallied on the back of strong earnings from bank stocks including Goldman Sachs (GS) and Bank of America (BAC), both of which reported better than expected results. That's good news given that those two banks represent both institutional activity (Goldman) and commercial banking (Bank of America). As we discussed yesterday, financial stocks, especially huge banks, are often seen as bellwethers for both the economy and the stock market. A strong banking sector is a good sign that the economy is robust, business activity is humming along. Stocks should follow.

But we aren't out of the woods by any means, yet. (James has more on the S&P 500's 10-month trend and why it is still showing signs of weakness, in our chart of the day, below.)

Across the pond, UK Prime Minister Theresa May survived a vote of 'no confidence', and now must formulate a Plan B to present to Parliament next week for a vote. Given the vehemence of yesterday's opposition, it's remarkable that May survived the vote and has at least one more chance to deliver the Brexit voters asked for in June 2016.

The U.S. Government remains in partial shutdown. Pathetic.

Big Day for Banks

Bank of America reported a profit of $7.3 billion last quarter and $28.1 billion for all of 2018. Both were records for the Bank and its traditional lending businesses led the way. But like JPMorgan (JPM), which reported earnings yesterday, trading, especially bond trading, was an area of weakness, falling 15% last quarter.

If we look at Bank of America's results across its business divisions, we see strength in its consumer and global banking businesses, but weakness in what it calls "All Other". That's trading, and BofA called out the weakness in its fixed income, or bond trading, in its earnings report today.

Why it Matters

The bond market, also known as fixed income, has been under pressure for the past decade given how low interests rates have been, historically speaking. As we mentioned on Monday, there is an enormous build up of debt securities (bonds) outstanding and not a lot of buyers for it. That's a sign that investors either don't want to own debt because they don't believe in the creditworthiness of the issuers, or the returns for bonds just don't compare to stocks and other asset classes. It could be both. But oversupply, in any asset class, means prices will fall.

Today was Goldman's Day

Goldman Sachs had a blowout fourth quarter, topping analysts' estimates for both revenue and profits. The stock had its best day in a decade, rising 9.5%. It was the first earnings report under new CEO David Solomon, who is also known to spin a few records as a part-time DJ. (CNN has this photo of him that we are 'borrowing'. Awesome.)

While Goldman's results were strong, $8 billion in revenue and $2.5 billion in earnings (profit), it also reported sluggishness in trading, especially fixed income. I think we can call this a trend.

Beyond the results, the bank is mired in a scandal with the Malaysian government.

Here are two good background articles if you want to learn more:

Malaysia files criminal charges against Goldman Sachs in 1MDB Probe

Malaysia seeks $7.5 billion in reparations from Goldman Sachs

In summary, Goldman Sachs bankers helped Malaysia raise money for a $6.5 billion infrastructure and development fund. That money never made it to the projects it was intended to fund to help the country's 32 million citizens, according to several lawsuits. At least $4.5 billion was stolen from the fund by a disgraced Malaysian financier and others. One of those others was a Goldman banker names Tim Leissner.

Solomon addressed the issue on the earnings call with investors today:

"It's very clear that the people of Malaysia were defrauded by many individuals, including the highest members of the prior government,...Tim Leissner, who was a partner at our firm, by his own admission was one of those people...For Leissner's role in that fraud, we apologize to the Malaysian people."

The issue is far from over for Goldman, as it faces lawsuits on multiple fronts and a Dept. of Justice investigation. While the stock may have rallied today given its strong results last quarter, investors have punished it over the past 6 months.

Crime doesn't pay.

Chart of the Day: S&P 500 Still Below Key Moving Averages

While the market's sharp rebound and recovery since late December has been truly impressive, some analysts are warning that it may be a bit too early to jump back into the fray. What's behind these concerns amid rallying markets? It's all in the moving averages.

Many technical analysts have a special affinity for moving averages, those squiggly lines that provide a running tally of average prices over the past x number of periods. The most commonly watched moving averages include the 200-day and 50-day, which are both plotted on a daily chart. For longer-term chartists, the 10-month is probably the most commonly plotted moving average on the monthly chart. But when you do the math, the 10-month is essentially around a 210-day moving average, which is very similar to the ubiquitous 200-day. So then, why use the 10-month moving average at all? Some see the daily chart as too fast, as it has new market closes every day. This can result in whipsaws above and below moving averages, thereby providing frequent false signals. The monthly chart obviously has only one close a month, which means that its signals are much slower and more stable than the daily or even weekly chart.

So what is the 10-month moving average telling us now? According to some market-watchers, a monthly close below the 10-month moving average is a sign that investors should be in cash, and not invested in the stock market. A close above the moving average, in contrast, is seen as a signal to invest in the market. Last month - December - saw the S&P 500 close way below the 10-month moving average, which suggests that investors should now be holding cash. In fact, the daily chart is saying pretty much the same thing, as price is also currently trading under both the 200-day and 50-day moving averages. While moving averages alone should not be the sole basis for investing or not investing, it's almost always a good idea to exercise increased caution during still-volatile market environments.