If only the sales and earnings outlook were this sunny.

Photographer: Daniel Acker/Bloomberg

The Emerging-Markets Bellwether From Peoria

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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Caterpillar is having a really tough year. A really tough half-decade, actually -- the company says sales will decline in 2016 for the fourth year in a row. It also said it would cut as many 10,000 jobs, or 9 percent of its workforce.

From the account by Bloomberg’s Sonja Elmquist:

“They’ve finally opened up the manila envelope that says ‘doomsday’ on it and they’re executing the plan that they hoped they would never have to execute,” Sameer Rathod, a San Francisco-based analyst at Macquarie, said by telephone. “The fog of war is very thick right now and no one knows what the shape of the downturn looks like or any shape of the recovery.”

Wow, that sounds really bad! It makes sense, though. Caterpillar is the world’s biggest maker of machines used in building things, digging things up and drilling for things. After riding booms in emerging-market construction, mining and oil, it’s now being hit by busts in all three. And of course those three busts are interconnected, as the emerging markets slowdown has cut demand for natural resources.

Bloomberg’s Joe Weisenthal had the bright idea this morning of charting Caterpillar’s stock against the MSCI Emerging Markets Index during the past decade. It turns out their movements have been pretty similar. Here’s an even longer-term view, with the Standard & Poor’s 500 Index thrown in:

Caterpillar is based in Peoria, Illinois, and does a lot of its business in the U.S. (46 percent of revenue during the past four quarters, up from 36 percent in 2011). Except for during the financial crisis of 2008, though, its share performance hasn’t tracked that of the U.S. stock market. Emerging markets are a closer match, but Caterpillar has actually been a much better way to invest in their growth than emerging-markets stocks themselves.

Will that continue? That’s where the fog of war comes in. Clearly Caterpillar faces some more tough times. But eventually emerging-market economies will rebound, and resource prices will too. I’m guessing the people in Peoria will be ready.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Justin Fox at justinfox@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net