Why Caterpillar Isn't the Only Dow Stock You Should Worry About

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

The Dow Jones Industrial Average (DJINDICES: ^DJI  ) started the morning off on a down note, falling 82 points as of 10:50 a.m. EDT. Bad earnings news from Caterpillar (NYSE: CAT  ) raised new questions about whether the global recovery will be strong enough to trigger a new wave of construction and infrastructure activity, sending Caterpillar shares down 6%. Yet Dow investors shouldn't assume that Caterpillar is the only stock that has something to lose from poor macroeconomic conditions around the world. Both General Electric (NYSE: GE  ) and McDonald's (NYSE: MCD  ) could see pressure from the same issues affecting Caterpillar, albeit for different reasons.

The big drop in Caterpillar's revenue and earnings was largely expected, although the extent of the declines exceeded even the pessimistic expectations that most investors had. Sales plunged more than 18%, leading to a 44% drop in earnings. Even worse, the company cut its full-year 2013 earnings outlook by another $1 per share to $5.50. A drop of 63% in mining-equipment orders for the company's Asia-Pacific segment highlighted the impact of falling commodities prices and the sluggish Chinese economy on Caterpillar's results.

Caterpillar has suffered for a long time from the stubborn weakness in economic conditions in China, and the big drop in gold and silver prices earlier this year only exacerbated unfavorable price trends in commodities more generally. But General Electric fell 1.3% this morning, and part of that unquestionably has to do with its push into the mining-equipment sector and the implications that Caterpillar's results have for GE's business. Obviously, General Electric has a much broader set of businesses under its conglomerate umbrella, leaving it less specifically vulnerable to mining-industry challenges. But its other industrial businesses benefit from strong economic conditions abroad, and GE would prefer to see China do better.

Even beyond the industrial world, Asia wields extensive influence. McDonald's was also down more than 1% in early trading, and it has seen weak earnings results as well, due largely to poor comparable-store sales in its Asia-Pacific, Middle East, and Africa segment. Caterpillar's results might point to a single element of Asia's economic activity, but it also has broader implications that could trickle down to the rising consumer class. If consumers are hurt, the impact on McDonald's could be larger than many people expect.

Should you invest closer to home?
Caterpillar proves just how important it is to keep some of your investments close to home. With the European debt crisis and slowing growth in China, you should consider taking advantage of one trend that's leading many to conclude that "The Future is Made in America." Domestic manufacturing is poised to once again become the investment driver of the world, and all because of one disruptive technology. You can uncover the three companies that will become the American Steel of tomorrow in The Motley Fool's new free report. Just click here to read more.


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