On the Way to Higher Stock Prices, Something Suddenly Happened

Stock Investors Lose Touch with RealityOn February 24, the S&P 500 broke to a new all-time high. There was panic buying as soon as the markets opened that day, as the chart below depicts.

Looking at this, I can’t help but ask if investors have completely lost touch with reality. It seems the fundamentals that drive stock prices higher—corporate earnings—have been ignored.

And as investors are driving key stock indices higher, the state of the global economy is becoming worrisome. This can’t be stressed enough: the U.S. economy isn’t immune to a disturbance in the global economy. But this isn’t all; if the global economy sees an economic slowdown, the companies on U.S. key stock indices suffer as well.

S&P 500 Large Cap Index ChartChart courtesy of www.StockCharts.com


One clear example of this, as it stands, is Caterpillar Inc. (NYSE/CAT), a giant industrial goods manufacturer and component of the S&P 500. The company reported that annual sales declined 16% in 2013. Caterpillar’s revenues were $55.65 billion compared to $65.87 billion. The company’s corporate earnings per share were down more than 32% in 2013. The reason for this: a challenging business environment in the global economy. (Source: Caterpillar Inc., January 27, 2014.)

The global economy is going to disappoint in 2014.

First in line is Asia. Look anywhere on that continent, and you will see economic slowdown looming in the air. China, the biggest economic hub in the region and the second-biggest in the global economy, is outright slowing down. In February, the manufacturing activity in the country dropped to a seven-month low. The HSBC Flash China Manufacturing Purchasing Managers’ Index (PMI) registered at 48.3 in February compared to 49.5 in January. (Source: Markit, February 20, 2014.) Any PMI reading below 50 suggests contraction in the manufacturing sector.

Other major economic hubs in Asia, such as Japan and India, also show the region is in trouble.

The eurozone, the biggest economic hub in the global economy when looked at as a whole, continues to show signs of stress. Countries like Spain and Greece are in a deep economic slowdown, but we continue to see economic data that suggest Germany’s economy, the biggest in the region, is also under stress. In February, manufacturing output in the German economy declined to a three-month low. (Source: Markit, February 20, 2014.)

And in South America, the economic slowdown is gaining strength. In February, in Brazil, manufacturing production growth in the country was the slowest since September of 2013. Manufacturing employment also declined in the Brazilian economy with businesses saying they are uncertain about the economic outlook. (Source: Markit, February 3, 2014.)

Tell me, how will all of these troubles in the global economy not impact the key stock indices?

From my experience, you don’t make money when everyone is running to buy stocks. You buy when everyone is selling; you buy when no one wants to buy. In 2009, I told my readers to buy stocks. But as it stands now, this is not the time to buy—it’s the time to sell.