By Karen Langley
Transportation stocks haven't hit a new high in 16 months, a
potentially ominous sign for investors betting on a pickup in
global growth.
The Dow Jones Transportation Average -- which tracks the
performance of 20 large U.S. airlines, truckers, railroads and
shippers -- is still 3.7% below its record from Sept. 14, 2018.
Over the same period, the Dow Jones Industrial Average has risen
11%, notching 31 closing highs along the way, according to Dow
Jones Market Data.
The transport stocks have also underperformed the blue-chip
index over the past three months, rising 4.6% versus the Dow
industrials' 8.7% gain. That disconnect raises concern for
proponents of the Dow Theory who say weakness in shares of
companies that transport raw goods and materials can point to
turmoil for the broader market.
Disappointing results from companies including trucker J.B. Hunt
Transport Services Inc. and logistics firm Expeditors International
of Washington Inc., along with signs of weakness in freight
activity, have weighed on the transports lately.
"The fact that the transports have lagged is a signpost of
sluggishness in the overall economy," said David Rosenberg, chief
economist and strategist at Rosenberg Research, who noted that
small-cap stocks also have failed to make new highs. The Russell
2000 index of small companies is 3.2% below its record close from
Aug. 31, 2018.
The recent market rally has been largely fueled by investor
demand for shares of fast-growing companies, such as technology
firms, while the members of the transport group tend to be
slower-growing and more subject to economic fluctuations.
"The transports lagging is part of the general lagging of
value-oriented stocks," said Ed Keon, chief investment strategist
at multi-asset manager QMA.
To be sure, the stocks have underperformed at other points in
the bull-market run and the broader index has continued to hit new
highs.
Although the economy as a whole appears to be humming along,
manufacturing has been in a rut. The U.S. factory sector contracted
in December for a fifth consecutive month, with a reading from the
Institute for Supply Management at its lowest level since June
2009.
In one sign of the tough environment for transport, the Cass
Freight Index, a measure of North American freight activity, showed
shipment volumes dropped 7.9% in December from a year earlier,
while freight expenditures dropped 6.2%. Both measurements were at
their lowest level of 2019.
"They're like hand in glove," said Nela Richardson, investment
strategist at financial services company Edward Jones, referring to
the relationship between transportation and global manufacturing.
"We're seeing transportation doing pretty well, given low volumes,
but a catalyst for growth in the transportation sector would be a
rebound in manufacturing."
Manufacturing accounts for only 11% of U.S. gross domestic
product, and the broader picture shows signs of strength.
Unemployment is at a 50-year low, and consumer spending has been
solid.
The long-simmering trade war between the U.S. and China has
weighed on global manufacturing activity. But the outlook has
brightened as the two countries reached an agreement in recent
weeks. The International Monetary Fund predicted this week that
global gross domestic product will expand by 3.3% in 2020, up from
2.9% in 2019.
"If we're right that the trade deal as well as some of the
firming of economic data leads to an improvement in overall
volumes, then that should be a benefit for this group," Chris
Shipley, head of fundamental equities at Northern Trust Asset
Management, said of the transport stocks.
Although investors have reacted positively to the
ratcheting-down of trade tensions between the U.S. and China, some
note that the agreement leaves in place U.S. tariffs on about $370
billion in Chinese goods.
"This idea that growth is going to jump on this trade deal may
not be realized," said Peter Boockvar, chief investment officer at
Bleakley Advisory Group.
Earnings season has gotten off to a rough start for some
companies in the sector.
Shares of J.B. Hunt dropped 4.2% on Jan. 17 after the trucking
company reported lower-than-expected profits for the fourth
quarter. Expeditors International shares fell 5.6% the same day,
after the company said that its quarterly revenue and earnings will
fall short of Wall Street expectations. The company partly blamed
trade disputes and the slowing of global economies.
And freight rail operator CSX Corp. projected another
challenging year in 2020 when it reported declines in quarterly
revenue and profit. It also posted a record efficiency level and
saw its shares drop only 0.4% on Jan. 17, the next trading day.
"It took industrial activity a while to cool off, and it will
take a while to heat back up," CSX CEO Jim Foote said on a call
with analysts on Jan. 16.
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Write to Karen Langley at karen.langley@wsj.com
(END) Dow Jones Newswires
January 24, 2020 08:14 ET (13:14 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.