What Investors Need to Know About the Current Market Cycle

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What Investors Need to Know About the Current Market Cycle

If there ever was an equity security epitomizing the notion that the stock market is a leading indicator, Caterpillar Inc. (CAT) would fit the bill.

This manufacturer is in slow-growth mode, but it’s been going up on the stock market as institutional investors bet on a global resurgence for the demand of construction and other heavy equipment and engines.

And the betting’s been pretty fierce. Caterpillar was priced at $90.00 a share at the beginning of the year. Now, it’s $110.00, which is a substantial move for such a mature large-cap. (See “Rising Earnings Estimates the New Catalyst for Stocks?”)

The stock actually offers a pretty decent dividend. It’s currently around 2.6%.

While sales and earnings in its upcoming quarter (due out July 24, 2014) are expected to be very flat, Street analysts are putting their focus on 2015. Sales and earnings estimates for next year are accelerating, and it’s fuel for institutional investors with money to invest.

The notion that the stock market leads actual economic performance is very real. Just like there are cycles in the economy, the stock market itself is highly cyclical. And while every secular bull market occurs for different reasons, there are commonalities in the price action.

Caterpillar’s share price is going up on the expectation that its sales and earnings (on a global basis) will accelerate next year.

Transportation stocks, as evidenced by the Dow Jones Transportation Average, are the classic bull market leaders.

Transportation, whether it’s trucking, railroads, airlines, or package delivery services, is as good a call on general economic activity as any. The Dow Jones Transportation Average was at 6,440 this time last year. Now, it’s above 8,200, which in itself is very telling.

And institutional investors have the money to invest. They don’t get paid to sit on cash. Below-market interest rates for financial institutions are not particularly helping the consumer or small business owner looking for a loan, but the liquidity helps institutional sentiment. Monetary policy is the most powerful force in the stock market.

So transportation stocks have been very strong the last 12 months, Countless blue chips are pushing their highs, and mature industrials like Caterpillar have turned higher on the expectation that 2015 will be better than 2014.

Even old large-cap tech has broken out of recent price consolidations. Companies like Microsoft Corporation (MSFT) and Intel Corporation (INTC) have been doing well on the stock market lately.

Intel, which has been in no-growth mode for a number of quarters, recently increased its guidance. The stock is up five full points since May.

I believe we are in a new stock market cycle that falls under the category of a secular bull market. And it is very much ahead of Main Street economics.

The beginning of 2013 was the breakout from the previous long-run cycle, which was a recovery stock market that burst with the technology bubble and produced another financial crisis.

A secular bull market is a longer-term cycle. Within it, recessions occur, the stock market can crash, and interest rates can soar.

Genuine economic growth (and rising incomes) is still a tough thing to generate. But all this stock market needs is just a little bit of it and institutional investors will keep buying.

The current cycle has a lot more legs. We’re only nearing the end of its beginning.

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