BULL MARKET RUNNING OUT OF BREATH?
Transportation sector, seen as proxy indicator of economy’s health, is slowing
THE United States transportation sector, which many see as a proxy indicator of the economy’s health, has retreated 3.1 per cent from its September 14 record, hinting to some analysts that the longest bull market on record has entered its late stages.
Railways, freight carriers and package deliverers get less attention than heavy-hitting momentum stocks like Apple Inc and Amazon.com Inc, but the sector could be showing cracks in what analysts and the US Federal Reserve characterise as a robust economy.
Several constituents of the Dow Jones Transportation Average (DJT) have provided disappointing guidance in recent months. As the third-quarter reporting season approaches, investors will watch to gauge whether trade, fuel and dollar risks are affecting the sector’s bottom line.
The 20-company DJT has recently diverged from the broader market after a strong run since late June, suggesting these headwinds could be taking a toll.
As the DJT has retreated, the broader Dow Jones Industrial Average has moved in the opposite direction. The Dow reached its most recent all-time high on Tuesday, 13 trading days after the DJT’s September 14 record.
Diverging highs between the two indices can signal growing market instability. Similar divergences occurred leading into the recessions of 2001 and 20082009, and most recently heading into the market correction that began in late January.
“The transports have been going sideways and haven’t confirmed the new highs in the industrials,” said Michael O’Rourke, chief market strategist at JonesTrading in Greenwich, Connecticut. “If the transports were to break down further from these levels, if you saw them declining another two or three per cent in the near future, you would call that a bearish non-confirmation.”
On Friday, both indices closed lower, with the DJT slipping 0.8 per cent and the Dow Jones Industrial Average dropping 0.7 per cent.
Delta Air Lines Inc is due to report tomorrow, a week after lacklustre forecasts from the company and its peer United Continental pulled US airline stocks lower.
FedEx Corp, the first in the group to post quarterly earnings on September 17, missed Wall Street estimates as costs weighed on margins. The global package delivery company has been challenged this year by the ongoing trade disputes between the United States and its major bilateral trading partners, notably China and Europe.
Although a preliminary deal to replace the North American Free Trade Agreement has boosted railway stocks, looming tariffs threaten to increase the cost of transporting goods and services, further testing other DJT constituents.
“There may well be blood in the water before we actually get some kind of agreement on trade between the US and China,” said Bernard Baumohl, managing director and chief global economist at the Economic Outlook Group in Princeton, New Jersey. “It could do some serious damage in the long run as China seeks to establish new supply chain routes from other countries and rely less on the US.”
Analysts see costs of transportation fuels, which include petrol, diesel and jet fuel, continuing to climb due to tightening supply and increasing demand.
Rising fuel costs were “depressing stocks that make up the transportation index”, Baumohl added.
Brent crude prices have risen nearly 26 per cent since the beginning up the year and energy analysts see the trend continuing well into next year.
“In the near-term we’ve seen prices increase as a result of Iranian sanctions reducing the supply of crude oil to the market,” said Andrew Lipow, consultant at Lipow Oil Associates in Houston. “I expect that over the next year, the price in transportation fuel is going to be increasing.”
The climbing US dollar could also pressure transportation companies as US goods grow less affordable to foreign consumers, which might result in fewer shipments abroad.
Meanwhile, investors will get a clearer picture in coming weeks of the extent to which trade jitters, fuel costs and the rising dollar may have turned transports into a warning sign.
“There are a lot of wild cards out there now,” said Baumohl.