Slide in Transportation Stocks Flashes Warning About Economy

Transportation stocks are falling twice as fast as the hard-hit US stock market, reflecting investor expectations that a recession is likely to be imminent.

The Dow Jones Transportation Average, which tracks 20 major US companies from airlines to railroads to truckers, is down 12% this month. The S&P 500 and Dow Jones Industrial Average are down about half as much.

Historically, declines in transportation stocks have portended tough economic times amid lower demand for goods, materials and travel — widely expected to result from the Federal Reserve’s most aggressive tightening cycle in decades.

“It’s confirmation that we’re headed for a recession,” said Peter Cardillo, chief market economist at Spartan Capital, of the decline in transportation stocks. Mr. Cardillo predicts there will be a mild global recession later this year that will last through the second quarter of 2023.

The transport index is on track for its biggest monthly percentage decline since March 2020, when pandemic-related restrictions and lockdowns halted travel and disrupted global supply chains. It’s down 26% this year, trading at its lowest level since late January 2021.

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Behind the slide? FedEx corp

FDX -3.37%

Recently, executives spooked investors when they warned of a looming global recession and outlined plans to hike shipping rates to help offset the lower volume of goods moving around the world. Shares of the delivery giant are down 29% this month.

“They built a lot of capacity when everyone was buying stuff, and now they’re stuck with excess capacity,” said Peter Boockvar, Bleakley Financial Group’s chief investment adviser, of some transportation stocks. “At the same time, people are buying less stuff.”

Other stocks that suffered sharp declines in September include United Parcel Service inc,

UPS -2.10%

down 16%; Car rental company Avis Budget Group inc,

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DARE -0.50%

by 17% and the freight rail company Norfolk Southern corp

NPC -3.14%

down 10%.

Mr. Boockvar said valuations of some transportation stocks have fallen enough to become attractive buying opportunities again.

Equities across all sectors have come under pressure this year as the Fed has aggressively hiked interest rates to tame inflation and slow the economy. Last week, Fed Chair Jerome Powell signaled that more big rate hikes are likely, even if they increase the risk of a recession. Global central banks have joined the Fed in raising rates, adding to fears of a global slowdown.

The Baltic Dry Index, which measures the cost of shipping around the world, has fallen sharply from its highs at the start of the pandemic and has recently hit its lowest level since June 2020. Late summer is typically the industry’s peak season, but many cargo owners are shipping holiday goods early and inflation has impacted consumer demand.

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Sentiment was also dampened by high energy prices and labor disputes between the major rail freight companies and union leaders. Brent crude has been down for the past few weeks but is still up 11% in 2022.

“I’m not surprised that prices have fallen so much,” said Olivia Engel, senior managing director of State Street Global Advisors and chief investment officer of Active Quantitative Equity. Ms Engel said investors are unlikely to react bullishly on logistics companies in the near future as they are central to the global economy.

Write to Hardika Singh at [email protected]

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