Global Economy Headed for Misery; Be Careful if You Own Stocks

Economy Headed for MiseryTo gauge activity in the global economy, I follow two indicators very closely: how sales at multinational Caterpillar Inc. (NYSE/CAT) are faring; and trade activity in the global economy.

Global Economy Indicator #1

The chart below plots the percentage change in three months rolling sales at Caterpillar Inc., a large American company that sells heavy equipment worldwide.

As you can see from the chart, since December of 2013, sales at Caterpillar have been declining.

Caterpillar 3 -Month Rolling Sales Chart

Why is this critical? Caterpillar operates in the industrial goods sector with a focus on farm and construction equipment. If sales are declining at the company, it suggests industrial production is in a slump—construction, mining, and factories aren’t running at full throttle.

As you can see from the chart above, sales activity at Caterpillar have been a leading indicator of where the economy is headed. Sales declined at Caterpillar sharply before the Great Recession, recovering sharply in mid-2010, leading the economic growth that followed. It’s worrisome that Caterpillar sales topped out in mid-2011 and have been declining ever since.

Yes, Caterpillar does supply heavy equipment to the mining industry. But even with gold prices having stabilized from their 2013 price lows, sales have not come at Caterpillar.

Also Read: Global Economy: Its Weakness to Impact U.S. Economy and Stock Market

Global Economy Indicator #2

Next, let’s look at trade in the global economy through a chart of the Baltic Dry Index (BDI). I’ve shown this chart to Profit Confidential readers before. The BDI is essentially an index that tracks the price to move raw materials. If this index rises, it means the global economy is strong because countries are trading amongst each other. If the BDI is falling, it means trade is declining.

Baltic Dry Index (BDI)

Baltic Dry Index Chart

Chart Courtesy of www.StockCharts.com

While the BDI never recovered from the Great Recession, as the chart shows, since late 2013, the BDI has been on a rapid decline. Since most of the small goods used in the world today are manufactured and shipped out of China, I believe the action of the BDI was a clear forecaster of the slowing Chinese economy…which has now become well documented. China, after seeing its economy grow at 10% per annum for this year, had growth around seven percent last year and will likely have growth of only six percent this year.

In one of her speeches not long ago, Janet Yellen said, “…growth in many other parts of the global economy, including China and some other emerging market economies, has slowed. Weak growth abroad, together with its accompanying implications for exchange rates, has dented U.S. exports and weighed on our economy…” (Source: Federal Reserve, May 22, 2015.) Indeed, China’s slowing economy is having worldwide ripple effects.

As Goes the Global Economy, So Goes the Stock Market

As the global economy slows down, American companies that have global operations will see their revenues decline. Is it any wonder that S&P 500 companies are expected to experience a 4.6% decline in revenues in the second quarter of 2015? As the global economy faces headwinds, the U.S. stock market will see major turbulence.