A Dark Storm Ahead for the Dow?

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A Bloomberg headline earlier this evening read, "Thunderstorms, Tornadoes Threaten Washington Area." From my viewpoint in Alexandria, Va., the dark gray clouds hovering over D.C. look ominous, but the weather might be the least of the White House's worries today.

At this juncture, the real threat to anyone affiliated with the current administration deals less with meteorology and more with the economy. And the news this week has been dismal in that respect. Let's revisit the troubling developments of the past two days to identify the trends that could push the DowJones Industrial Average (INDEX: ^DJI) , representing the broad American market, lower in the months to come.

Cyclicals cast a cloud
On Thursday, Joy Global (NYS: JOY) , the Milwaukee-based mining-equipment company, announced solid net income growth but warned of demand troubles ahead. The company's shares plunged 10% in the past three days, and the news sparked a sell-off of heavy-equipment maker and Dow component Caterpillar (NYS: CAT) as well. Caterpillar's down nearly 8% since Wendesday's close. More on this worrisome trend in a moment.


The pressure intensifies
Almost simultaneously on Thursday, weaker-than expected figures on private-sector job growth emerged, and the initial estimate of U.S. GDP in the first quarter was revised lower from 2.2% to 1.9%. While Europe's fiscal crisis and China's stimulus plan stole the headlines earlier this week, suddenly some news that hit close to home emerged to drag down the markets. The Dow finished down only 0.2% on Thursday, but the market's close marked a 6.2% drop for the month, the worst in exactly two years for the index.

And then the deluge
Unfortunately, Friday would deliver even more dire news for investors. The Labor Department revealed a net gain of 69,000 jobs in May, an anemic number that was exacerbated by the news that job gains reported for March and April would be revised downward. The U.S. economy, instead of plodding forward, was falling behind, and employment ticked up from 8.1% to 8.2% in April.

With a perfect storm brewing across the pond, the news sent American markets plunging on the unsettling news. The Dow closed down 2.22% and the S&P 500 (INDEX: ^GSPC) tanked 2.46% to cap off the week.

So, what's the forecast?
As a takeaway, let's focus on the outlook for the Dow given these recent developments. Perhaps most concerning is the sequence in which the events unfolded. Economists often focus on leading indicators to forecast the rise and fall of a country's GDP. The science, much like meteorology, is not exact, but will often revolve around three preferable metrics: commodity demand, employment figures, and growth or decline in construction projects.

According to Joy Global, a company directly exposed to demand for commodities and natural resources, the outlook is bleak. The reversal in the employment figures doesn't bode well, either. Finally, Caterpillar, whose sales might provide the best insight into economic trends (economists have estimated Cat's sales predict shifts in U.S. GDP with a lead time of six to nine months), recently commented that the Chinese market, previously expected to grow at 5% to 10%, will actually decline this year. A falloff in sales for this heavy-equipment maker would not bode well for the U.S. economy.

How to ride out the storm?
Right now, Europe's in shambles, China's trying to stimulate growth through infrastructure investments, and America's wondering whether the employment outlook could actually deteriorate. As my colleague Eric Bleeker points out, steps could be taken in the near future to address declining growth prospects. While central bankers digest the recent news and figure out their best move, however, investors should be considering the steps to take to stabilize their portfolio. To get you started on the right foot, our top analysts have assembled a special free report with your portfolio and retirement plans in mind. Take a moment to download a copy, and consider whether the saving habits described could allow you to weather any storm and position yourself to build long-term wealth.

At the time this article was published Isaac Pino owns no shares in any of the companies mentioned in this article. The Motley Fool owns shares of Joy Global. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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