Will Today's Surge Reverse the Dow's Trajectory?
The Dow Jones Industrial Average (INDEX: ^DJI) , well-rested after an extended weekend, sprang to a strong start today, gaining just over 1%. The stock market rally baffled many onlookers early on, especially since consumer confidence data fell by almost 4 points, the largest dip since October. While various outlets took a stab at explaining today's isolated movement, let's consider a few events that could prove critical over a longer horizon. Perhaps the Dow can wake up from its monthlong slumber.
China picks up the slack
Make no mistake: Chinese spending on the consumer front remains robust, especially for many American products -- see Apple (NAS: AAPL) . Instead, it's the American consumer's fickle behavior that manages to rattle the markets every month or so. Fortunately, the markets appeared to shrug off weak consumer confidence data in part because spending on major infrastructure projects in China will receive another boost.
Why does this matter to American blue chips? For large industrial companies like Caterpillar (NYS: CAT) and General Electric (NYS: GE) , China and other East Asian markets represent tremendous opportunities for growth. During its first-quarter earnings call earlier last month, however, Caterpillar commented on weaker-than-expected growth in China. The revelation that the Chinese government will inject upwards of $315 billion in infrastructure piqued the market's interest, though, and pushed Caterpillar 2.87% higher during today's trading.
GE, much like Caterpillar, has exposure throughout the Far East but has recently been homing in on Australia because of its vast energy resources. At the end of the day, however, demand for those energy resources stems from China and nearby countries, so the stability of those economies is absolutely critical.
The sustainability question
Digging deeper, my colleague Eric Bleeker points out that all stimulus initiatives are not created equal. The rollout in China might not resemble the spending initiated during the global financial crisis, so the question remains: Will this jump-start sales for companies like Caterpillar and GE, or will a slump resume after a temporary energy jolt?
There's a reason Apple's second-quarter sales in China soared whereas Caterpillar resorted to "diverting units" from the mainland to nearby countries. Cat's earth-moving equipment might not carry the same allure as a nifty iPhone, but the industrial giant serves as one of the leading indicators for a country's GDP. If Caterpillar's sales taper off, this could be a warning sign for China's declining economy and, consequently, the Dow. Considering China's recent steps to curb inflation, however, I believe the pivot toward spending will at least prevent growth from decelerating too rapidly.
Ironically, China's resilient consumer demand and willingness to invest in infrastructure strikes a stark contrast to our current domestic situation. With the election around the corner, serious doubt lingers over the extension of the payroll tax cut, which aims to encourage consumer spending, and government infrastructure investment remains weak. For now, investors must wait and see how these storylines unfold. However, there are a few ways the savviest investors can prepare for the November showdown. The Motley Fool recently released a special report that outlines the stocks you need to know about before the election. Start your research well in advance by downloading "These Stocks Could Skyrocket After the 2012 Presidential Election."
At the time this article was published Isaac Pino owns shares of GE. The Fool owns shares of Apple.Motley Fool newsletter serviceshave recommended buying shares of Apple and creating a bull call spread position in Apple. 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.
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