The economy is primarily analyzed using the Gross Domestic Product (GDP) and employment levels. The GDP is a measure of all the goods and services produced in an economy. Economic growth is when the current and future periods of time are experiencing an expansion in GDP. As businesses increase their sales and are more confident about future activity, they hire more people. The new hires are more confident about their future and spend a portion of their income on business and the cycle continues. The stock market usually leads an economic recovery, because stock investors look to the future. If investors foresee an economic recovery 12 months from now, they will start to accumulate shares in companies that will benefit.
If there ever was an equity security epitomizing the notion that the stock market is a leading indicator, Caterpillar Inc. (CAT) would fit the bill.
This manufacturer is in slow-growth mode, but it’s been going up on the stock market as institutional investors bet on a global resurgence for the demand of construction and other heavy equipment and engines.
And the betting’s been pretty fierce. Caterpillar was priced at $90.00 a share at the beginning of the year. Now, it’s $110.00, which is a substantial move for such a mature large-cap. (See “Rising Earnings Estimates the New Catalyst for Stocks?”)
The stock actually offers a pretty decent dividend. It’s currently around 2.6%.
While sales and earnings in its upcoming quarter (due out July 24, 2014) are expected to be very flat, Street analysts are putting their focus on 2015. Sales and earnings estimates for next year are accelerating, and it’s fuel for institutional investors with money to invest.
The notion that the stock market leads actual economic performance is very real. Just like there are cycles in the economy, the stock market itself is highly cyclical. And while every secular bull market occurs for different reasons, there are commonalities in the price action.
Caterpillar’s share price is going up on the expectation that its sales and earnings (on a global basis) will accelerate next year.
Transportation stocks, as evidenced by the Dow Jones Transportation Average, are the classic bull market leaders.
Transportation, whether it’s trucking, railroads, airlines, or package delivery services, is as good a call on general economic activity as any. The Dow Jones Transportation Average was … Read More
By no surprise to me whatsoever, the government’s third and final estimate of first-quarter U.S. gross domestic product (GDP) came in at a negative annual pace of 2.9%. (Source: U.S. Bureau of Economic Analysis, June 25, 2014.) The U.S. economy’s growth rate in the first quarter of this year was the worst since 2009.
I’ve been writing since the fall of 2013 that the U.S. economy would see an economic slowdown in 2014. I have been one of the few economists warning of a recession in 2014. My calls are not to scare or create fear; rather, they are based on the government’s own data.
Not to boast, but it’s like the creators of the first-quarter U.S. GDP report have been reading Profit Confidential! Everything we have been warning about came out in this most recent GDP report.
I’ve been harping on about how the U.S. consumer was tapped out…and low and behold, consumer spending in the U.S. economy increased by only one percent in the first quarter of 2014. In the fourth quarter of 2013, consumer spending increased by 3.3%. The fifth year into the so-called economic “recovery” and consumers are pulling back on spending for the simple reason that they don’t have money to spend.
The poor have no money; the middle class has been wiped out. And the rich are far from spending enough to make up for the lack of spending by the poor and middle class.
But have no fear, dear reader; stocks are up. The stock market is telling us we have nothing to worry about? It seems so.
I, for one, … Read More
Dear reader, if you’ve learned one thing from reading these issues of Profit Confidential, I hope it is this: Don’t buy into the hype created by the rising stock market and the media that the U.S. economy is improving. The economic growth promised by the Federal Reserve and the politicians five years ago is still missing.
The majority of Americans are facing serious financial troubles. Their jobs don’t pay them well or enough. Those who are looking for better jobs can’t find them. Their salaries aren’t increasing, but inflation sure is rising. Many Americans can’t even afford to live in their homes!
And young Americans are in just as bad shape as retired Americans…
According to research by the University of Arizona, half of graduates, after they are out of college for two years, are relying on their parents or other family members for financial support. As per the study, graduates are postponing many of life’s goals, such as marriage, having children, or buying homes, because they can’t afford them. (Source: CNN Money, June 10, 2014.)
In times of economic growth, you have college graduates finding jobs easily. This isn’t happening. In fact, student debt in this country sits at $1.2 trillion, 85% of it guaranteed by the government and 11.5% of it 90-days-plus delinquent or in default. (Source: “$1 Trillion Student Loan Problems Keeps Getting Worse,” Forbes, February 21, 2014.)
But it’s not only college graduates in the U.S. economy who are suffering…
According to the “How Housing Matters Survey” by the John D. and Catherine T. MacArthur Foundation and Hart Research Associates, 52% of Americans have … Read More
Historically, the direction of lumber prices has led the direction of the stock market.
If lumber prices are rising, it suggests demand for lumber is increasing, more homes are being built, more construction is happening, and the economy is improving. The opposite is also true. Weak demand for lumber is a sign of poor economic growth.
At the very core, the direction of lumber prices can be considered as a leading indicator of the S&P 500.
With that said, please take a look at the chart below. On the chart, you will see the S&P 500 in black and the lumber prices in green. You will note that whenever lumber prices went down, the S&P 500 followed and also moved lower with one exception: the present time.
Chart courtesy of www.StockCharts.com
Since March of this year, lumber prices have fallen sharply, suggesting business activity in the U.S. economy is slowing down. But the S&P 500 is moving in the opposite direction! Lumber prices are going down and the S&P 500 is moving up? That never happens. This disparity is a sign of great concern.
You can add the disparity in the direction of lumber prices compared to the direction of the S&P 500 index to the long and increasing list of historical indicators now pointing to a market that is overbought and overpriced. If you continue to own equities, be wary of the increasing risks of the stock market…. Read More
With the Dow Jones hitting 17,000 being pretty likely in the not-too-distant future, from there, it’s only another 18% or so until the Dow hits 20,000, which is pretty incredible.
These numbers seemed so unrealistic just a few years ago but now, it’s not too farfetched. The most amazing thing to me is that stocks still haven’t experienced a material price correction since the financial crisis.
Stocks aren’t necessarily stretched in terms of valuation, especially with corporate earnings outlooks holding up for this year and going into 2015. What is stretched is investor determination with a market at its high.
Johnson & Johnson (JNJ) is a great company and a worthy long-term investment (see “Three Blue Chips Set to Drive Higher”), but it’s tough to buy stocks at all-time record-highs. In Johnson & Johnson’s case, the position’s up almost 20 points since the beginning of February, and this is on top of a previous 20-point gain in 2013.
One of these days, stocks are going to get walloped. But there’s got to be some sort of catalyst for it to happen.
The Federal Reserve can be a catalyst if it decides to suddenly change its outlook for interest rate certainty. The catalyst could also be a geopolitical event or something that comes out of nowhere, like a big derivatives trade gone bad.
In any event, there will have to be a shock that is perceived to have a lasting effect on capital markets.
In the lull between earnings seasons, which we’re currently experiencing, stocks reaccelerated on the back of very modest economic news and that in itself is … Read More
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