The 132-year-old Dow Jones Transportation Average (DJTA) begins the week just 300 points below its all-time closing high of $9,421 set 11 days ago, even though there isn't much for traders and investors to hang their hats on except the idea that transports are, to coin financial lingo, "inflecting."
The run has indeed been impressive. From an intraday low on Election Day of $8,158, the 20-stock index rocketed nearly 1,300 points in one month, though the index has given up nearly 300 points through Friday's close. The optimists point to the formation of a pre-election cyclical bottom that was poised to turn regardless of who won. That trend, they maintain, is being juiced by investors' belief that President-elect Trump's proposed mix of corporate tax cuts, a trillion dollars in infrastructure spending, and a streamlining of a burdensome regulatory processes would goose GDP growth and, by extension, shipping demand.
Those with a more reserved outlook acknowledge that there have been some signs of life in a sector that--with exceptions like parcel--has been in recession for about 15 months. Yet transport is still bumping along the bottom with weak pricing trends, less-than-robust demand, and users still in control, at least as far as contract rates are concerned, they contend. The DJTA's move, they argue, is divorced from reality, and the potential for the current rally being a predictor for a stronger macroeconomic climate six months out has already been priced into current equity values. In addition, the value of the U.S. dollar has commenced another in a series of surges that is likely to further suppress demand for U.S. exports, an element that has contributed to the persistent demand malaise since the fall of 2015.
Another factor may be the Federal Reserve's decision Wednesday to raise the federal funds rate that financial institutions charge each other for overnight loans by 25 basis points, with the prospect of several more hikes to come next year and into 2018. Most observers, however, said current rate levels are so low that even a short series of hikes is unlikely, in and of itself, to derail a recovery.Too far, too fast?
"The market continues to price into transportation stocks ... a higher-than-expected probability of a rosier view," John G. Larkin, lead transport analyst for Stifel, an investment firm, wrote in a research note Thursday. Larkin said the market has baked in a fanciful scenario where, quickly and almost simultaneously, the U.S. corporate tax rate will drop to 20 percent from 35 percent, a large infrastructure bill will sail through Congress, and energy self-sufficiency will be achieved. "We think it's unlikely that all are implemented in short order," he said.
Rising interest rates could further cloud the valuation picture for stocks of the public truckload companies, which have already enjoyed a nice run-up in the past month, Larkin wrote.
Benjamin J. Hartford, transport analyst for investment firm Robert W. Baird & Co., said that although the market may be turning up slightly, it is still in the process of troughing. Yet companies gathering at a Baird industrial conference shortly after the election were optimistic about the outlook under a Trump presidency, Hartford said. He estimated that prospects for a cyclical upturn in shipping have accounted for more than half of the surge in the Dow transports, with the balance coming from the fallout from Trump's victory, and the relief of finally having a winner after the most bruising campaign in decades.
Evidence of a still-struggling truckload sector came out of Swift Transportation Co.'s mid-fourth-quarter review on Dec. 9, when the Phoenix-based carrier, the industry leader in terms of sales, reported that core contract rates had declined slightly quarter to date, and with no discernable improvement in the first half of 2017. In addition, insurance premiums remain high as insurers adjust to the higher cost of legal awards, and the seller's market for used trucks showed a decline. Swift reported. During the second quarter, the carrier reduced the number of trucks in its core truckload fleet in a move to re-align resources with softer demand.
Swift executives forecast a healthier pricing environment in the second half of 2017, in part due to the impact of the federal government's mandate that all trucks built after the year 2000 be equipped with Electronic Logging Devices, or ELDs. Full compliance with the requirement is forecast to reduce fleet productivity by 5 to 8 percent in the immediate term as smaller carriers and owner-operators decide the rules are too expensive and onerous, and exit the market.Green shoots, anyone?
There is a fair amount of bullishness to go around. An early December poll of 99 transportation investors released last week by investment firm Wolfe Research LLC found that more than three-quarters of the respondents expect transport stocks to outperform the broader market in 2017. The optimism comes on the heels of the transport index already outshining the Standard & Poor's 500 index through early December. The respondents cited the benefits of proposed tax reform and massive infrastructure spending, and made the railroads their top choice among the transport modes.
In addition, bullishness among small businesses in November soared to levels seen only three times since 2007, according to a monthly index compiled by the National Federation of Independent Businesses (NFIB). The index is based on a survey of small business owners nationwide about their expectations for the future and their plans for hiring, ordering, and borrowing. "Some of the most dramatic results revolve around job creation and improving business conditions," said Bill Vernon, NFIB's Massachusetts state director, in a statement. "They show that small business owners are thinking about long-term growth for the first time in a very long time."
Bradley S. Jacobs, founder, chairman, and CEO of Greenwich, Conn.-based transport and logistics provider XPO Logistics Inc., said the run-up in transport stocks was not a knee-jerk reaction to Trump's election, but a reflection of the high expectations that the new administration has set for itself. "Rightly or wrongly, the market believes that lower taxes and a pro-business administration will stimulate the economy next year," Jacobs said in an email. "A higher GDP would mean more freight. This would translate into greater profits for transportation companies."
Jacobs added that transportation stocks have benefitted from the tailwind of trillions of dollars in worldwide institutional liquidity seeking better returns than what can be achieved with assets such as bonds and real estate.
For the mavens who follow the non-contract, or "spot" market, the seeds of recovery were planted some time ago. According to consultancy and trucking load board provider DAT Solutions LLC, the spot market bottomed in the first two months of the year, showed surprising resiliency during a traditionally weak summer period, and then gained steam into the late fall. During the week that ended Dec. 3, the dry van load-to-truck ratio, which measures the number of available loads posted on the DAT boards versus the number of trucks, soared to its highest levels since June 2014, while the ratio for the refrigerated segment hit its highest level since March 2015, according to company data.
Mark Montague, industry pricing analyst at DAT, said the activity on DAT's top 100 lanes was much bigger than normally experienced during a post-Thanksgiving Day period. While the gains could be chalked up to surging seasonal demand for e-commerce, other factors not affected by the holiday season are at work, Montague said. Businesses are starting to loosen their purse strings, and the construction activity so key to the trucking industry's fortunes is picking up, he said. "There is emerging confidence that a real turnaround is under way," Montague said.
That isn't a surprise to Jonathan Starks, COO of consultancy FTR. "I wrote back at the end of October that the trucking market was turning," Starks said in an e-mail. "The spot market data was clearly showing better results for both load availability and pricing." Because spot-rate trends generally lead contract rates by a number of months, Starks said, it will take some time before spot market improvements filter down to contract pricing, which account for the bulk of truckload transactions.
"The publicly traded (truckload) carriers will still probably show relatively poor results in the fourth quarter, but I expect their commentary to be slightly more optimistic," Starks said.