The Baltic Dry Index is an indicator of demand in the global economy. If the Baltic Dry Index is declining, it means the global demand for goods is softening. When you look at the chart below, you’ll see the devastated Baltic Dry Index—the index is saying demand never came back after the credit crisis of 2008.
Another key indicator for growth in the global economy is the major stock Caterpillar Inc. (NYSE/CAT)—a worldwide company involved in the capital goods sector.
Caterpillar is a bellwether stock because it gauges the activity of capital goods companies in the global economy. If these companies are not investing in new projects or upgrading their older equipment, it suggests the companies have a pessimistic forward-looking bias.
Below is a chart I’ve created for my readers that compares Caterpillar’s revenue growth to the growth rate of the world’s gross domestic product (GDP).
You can clearly see the relationship between the GDP of the global economy and Caterpillar’s revenue growth—they move very closely in line with each other.
Not long ago, Caterpillar issued its third-quarter corporate earnings. The company’s corporate earnings per share plummeted more than 42% compared to the same quarter a year ago—$1.45 per share compared to $2.54 in the third quarter of 2012. Caterpillar’s revenues plunged more than 18%, coming in at $13.42 billion compared to $16.44 billion in the third quarter of 2012. For fiscal year 2013, the company expects to have revenues of $11.0 billion less than the previous year’s—or 17% lower. (Source: Caterpillar Inc., October 23, 2013.)
When I look at these two key indicators of the global economy, they are very convincing. The global economy is standing on the cusp of an economic slowdown.
Sure, with the easy money policies of the past few years, the momentum for the stock market has been on the upside (“don’t fight the Fed; don’t fight the tape”). But longer-term, companies on key stock indices, many of which earn a significant portion of their revenues from the global economy, will see their stock prices deteriorate as their revenues decline. There will come a point when the “financial engineering” many public companies are engaging in won’t work anymore.