What Stocks Tell Us

Is it really any wonder GM and Ford stock both started tanking in early to mid-2002 before oil prices started to rise? Or is it just another classic case of stocks telling us what’s ahead for different parts of the economy?

I’ve often written about how the actions of the stock market, or particular stocks, tell us what’s headed our way economically.

As an example, to me it’s no coincidence that the big U.S. new home builder stocks peaked in mid-2005 and started moving down from there… before weak U.S. housing sales reports started coming in.

GE, appraised by the stock market as one of the world’s most valuable companies, has often been referred to as the ultimate indicator. GE is so big and is in so many businesses, that if its businesses and stock aren’t doing very well, it is likely that the economy will not fare well in the months ahead of the GE stock price action.

As nutty as it sounds, I truly believe the price action of stocks tells us, in a nutshell, the future.

I realize I’ll get Ford and GM executives e-mailing me today… telling me I’ve fallen off my rocker if I believe the stocks of GM and Ford foretell higher oil prices ahead. But, as an avid market watcher and economic writer, I’m obviously entitled to my opinion.

Back in the spring of 2002, when GM and Ford stock started moving down, perhaps it just spelled trouble for the car makers ahead. But, if we place us back in the spring of 2002, analysts at that time had few thoughts on why the freefall in GM and Ford stock started to take place. GM stock was at $65 in early 2002, today it’s at half that. Ford stock was at $18 in mid-2002, it’s at $8 today. There’s not doubt these stocks were leading indicators at the time of something going wrong in the industry… bloated inventories, maybe discounts too deep. But, in the end, it was higher oil prices that killed many auto lines.

Sales of the big Hummer H2 are just one example: H2 sales plummeted last year and are down another 32% so far this year. There’s no doubt higher gas prices put a “cap” on consumer appetite for big gas guzzling SUVs. GM, which now owns Hummer, spent millions of dollars developing a product line for the H2. It then smartly and quickly moved to the smaller and less gas guzzling H3. How fast can a huge auto maker bounce back and shift gears from big SUVs to smaller ones because of changing consumer wants? It takes time and money, as reflected in their stock prices.

(Thanks for the great feedback on my column from Monday, “Stocks Now at Critical Point in History.” Yes, the actions of the stock market over the next couple of months will be of utmost importance for us all. In case you missed the column, you can read it at http://www.profitconfidential.com/pc111606.htm.)