The Best Background for Stocks

 | May 29, 2014 | 7:26 AM EDT
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So often we forget what outlook makes for a good stock market. For example, as soft and cushy as life support is -- the operative way the market struggled out of Great Recession -- we would vastly prefer a healthier economy with a market that generated profits that could be returned to shareholders or reinvested in fast-growing businesses.

At the same time, we don't want the economy to be so red hot that the Fed has no choice but to raise rates. Any of us who have owned stocks during a period of high short-term rates knows all you do is sit there and hope the economy simmers because it is really bad for most equities.

That is why I found the words of Jack Koraleski, the CEO of Union Pacific (UNP), so soothing when I spoke to him yesterday. First, he's got a pulse on everything that moves. His rail handles traffic that comes from Mexico. He handles goods destined for China via California ports and vice versa. He's got a huge agricultural business and a gigantic chemicals business. The company hauls oil in the absence of pipelines and hauls pipe to build the pipelines. It takes fracking sand to where wells need to be drilled. It has a huge auto business and it has plenty of coal, of course. Intermodal, the cheaper way to send trucks from one destination to another, is a fast-growing part of the mosaic, as are building materials.

And how is Union Pacific doing? In a word, "good." That's right, business is good. I like that. You don't want to hear "booming" because with a cross-section of business like that you are going to have way too much pressure on the Fed to raise rates.

So many people have come into the market since the millennium began who have never experienced periods where business was just plain, old good, where some companies did better than others and some stocks were bargains because business was about to get better. That's just as you want it if the market's going to go higher.

Now, Koraleski is not an economist. He's better than that. He's a freight predictor with real money on the line. He didn't need to open up a new $400 million facility to handle business going from Texas to California and back, with a large component of it imports from Mexico. He would just otherwise return the cash to shareholders through bigger dividends and larger buybacks. He doesn't want to do that, though, because he sees the demand, particularly for intermodal, and he wants more of it for his company. It's the same reason why he's ordering more capital stock.

In other words, if you step away from all of the Fed chatter here or tax chatter there, if you get away from the endless polemical battles about the size of government and what it is or isn't doing, you find a vibrant private sector that's eager to invest and take advantage of a good business environment. For the 36 years I have been buying and selling stocks, that's been the best backdrop for stocks. No wonder they're doing so well.

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