Cautiously Optimistic

One company that’s been a stellar market leader over the last few years is Caterpillar. The heavy equipment manufacturer has distinguished itself by generating impressive financial growth, expanding around the world, and generating significant wealth for stockholders.

I’m a little worried now, because Caterpillar’s stock chart doesn’t look too healthy. The stock has had major pullbacks before, but the stock’s been in a steady decline since May and I can’t help but be worried about the broader stock market.

When stock market leaders start to break down in price, then you know you’re in for trouble. It’s a little early to figure right now, but I’d keep an eye on the big Cat for insight into the near-term direction of the market.

Despite Caterpillar’s weakness of late, the Dow Jones Industrial Average has held up surprisingly well. A lot of the big bellwether stocks aren’t doing much on the market, but they aren’t going down either. This is holding the Dow is a trading range and illustrates the indecisive direction of the market.

Right now, I’m cautiously optimistic that the main market averages can rally in the fourth quarter this year. All that’s required is for inflation and inflation expectations to be kept under control.

If the economy can slay the inflation beast without the economy going into recession, then we’ve got the makings of good times ahead. Some analysts are now calling for a significant slowdown in the economy in 2007 and a few are even predicting that the Federal Reserve will reduce interest rates next year.

At the end of the day, this is all just educated guesswork. Over the near-term, the stock market (and investors) will continue to be reticent. Over the medium-term, the economy is likely to slow measurably. In the long-term, well, nobody knows.