Predicting the Future—All You Need Are the Two R’s: Railroads and Retailers

Even the most seasoned institutional equity investor is asking him or herself, “…so now what?” There really is a lull in the equity trading action and volume is low. We’re not quite into first-quarter earnings season and corporations aren’t saying much. The economic data are mediocre at best and the stock market has already gone up tremendously. So, it really is a time when everyone is wondering what’s going to happen next. How the two R's—railroads and retailers—can tell us what could be in our financial future.Even the most seasoned institutional equity investor is asking him or herself, “…so now what?” There really is a lull in the equity trading action and volume is low. We’re not quite into first-quarter earnings season and corporations aren’t saying much. The economic data are mediocre at best and the stock market has already gone up tremendously. So, it really is a time when everyone is wondering what’s going to happen next.

The good news is that corporations are expected to do quite well in the first quarter. That’s the expectation and we have no reason to believe that they won’t deliver. The stock market, in my view, has about one more quarter of courtesy left in it before investors really start to get cranky about the economic data. The stock market has gone up over the last seven months specifically because of strong expectations for corporate earnings. That’s fair; but it isn’t sustainable unless the economy begins accelerating. This is why a lot of investors aren’t doing much in this market; because they don’t know what to do—the unknowns in the economy are very real.

The key to the stock market’s trading action going forward will be the transportation sector. The Dow Jones Transports Index has been struggling lately, but I think it has a good chance of reaccelerating in the not-too-distant future. Business for the railroads is strong and they remain one of the best barometers for economic activity, even as housing prices remain in the doldrums. Follow the railroads and retailers and you’ll have a good sense as to where stock prices should go over the coming months.

Now is the time for corporations to show their stuff. Investors have already bid up share prices with the expectation for strong earnings, and companies had better deliver. In fact, the stock market won’t be able to advance much higher if companies don’t beat consensus estimates and improve their guidance. That’s what the stock market is all about—increasing expectations for the future. Without an improvement in guidance, the marketplace will likely sell off for quite a while.

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It’s actually quite tough to be a new buyer of stocks at this particular point in time. It’s awfully risky taking on a new position without having a company’s latest financial report to go on. This always happens before a quarter closes and it contributes to the malaise in the marketplace.

Both stocks and commodities continue to be due for a correction. In my view, a meaningful correction would be a healthy development for the market this year. I don’t know if we’ll get one, but I would plan for one. The worst thing you can have is a stock market that just keeps going up. It makes the fall that much more painful.