They say that you can't or at least should not try to time the markets since you can often find yourself trying to catch a falling knife. That statement has a lot of truth since investors are not that likely to buy the bottom and sell the top. However, you can use fundamental trends to help you understand where the next trend may end.
As the American economy is set to pivot in the coming months potentially, there are specific markers - and markets - you can follow to guesstimate where certain stocks may end up going shortly. A new trend may be born because the FED could potentially take on a path of interest rate cuts in 2024.
Before you get the gist of which markets will be shifting soon, keep in mind that what you are here to read can lead you to consider stocks like Caterpillar (NYSE: CAT), Deere & Co. (NYSE: DE), and even Cummins (NYSE: CMI) as the type of names that could very well become the market favorites once the shift starts, but more on that in just a bit.
Cogs in the machine
The price of money is what interest rates are all about, and if the FED cuts rates, it will have a direct bearish effect on the Dollar index. While, in general, a weaker dollar can be bad for the overall economy, it can be suitable for those who do their homework to profit from the underlying trends.
What happens when the dollar comes down in the global currency markets? American exports become more attractive for foreign nations to buy as their currencies go a long way against a weaker dollar, making products cheaper. As a boost to the economy, this export activity can lead traders and investors into the manufacturing sector.
But these are just basic black-and-white views that any good economics book can give you, and ideas that are easy to come by certainly won't make much money. Now, realizing that this is also Wall Street's view can begin to add more confidence to the bullish thesis for manufacturing and exports.
Analysts at The Goldman Sachs Group (NYSE: GS) are making it a central theme in their macro 2024 outlooks. You see, they are well aware that the FED can sponsor a breakout in manufacturing, which is why Goldman expects a return in business activity for the whole space to catch up after a year of consecutive contractions.
Now, considering that the United States concentrates a good chunk of its exports on machinery, a direct advance in manufacturing activity and exports, as a result, will benefit machinery as one of the biggest exports. Get the picture now? Think machinery, think Caterpillar, Deere, and Cummins.
In the crosshairs
Aside from being in the machinery space, which now you know could face a coming bull market, these stocks rely on customers who operate in what is called 'defensive' industries, which get the name because of their 'immune' characteristic to the underlying economic cycle.
Think about it: Deere provides farming machinery, and people will farm and need food, no matter if you are in a recession or a boom. Caterpillar supports construction activity; if construction in the U.S. slows (which isn't Buffett's view), they are big enough to cushion it by focusing on international sales.
Cummins makes some of the diesel engines that fuel most of the manufacturing process, if not the ones that end up in Deere's tractors and Caterpillar's bulldozers. Anyway, the story sounds good so far. Still, it would be a fairytale if no numbers were included in the analysis.
Setting the upside benchmark, Deere analysts have set a price target of $439.7 on the stock, which would represent a net upside of 13.6% from where the stock is trading today. Judging by the way the markets feel about stocks like Scotts Miracle-Gro (NYSE: SMG), Deere is setting up to have an excellent quarterly result coming up.
For Caterpillar, you may have to be willing to ignore analyst sentiment in their $269.8 price target, which is 6.0% below today's prices. Being a contrarian could pay off in this case, especially if the underlying trend in the American housing sector is bullish.
Cummins analysts shook hands with Deere, as their set $263.8 price target brings an upside of 12.5% to be on the heels of Deere's. Suppose this double-digit upside potential wasn't enough. In that case, you can rest assured of a 2.9% dividend yield to nearly match today's inflation rates.
