Are transportation stocks the market's canary in a coal
mine?
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[October 05, 2018]
By Stephen Culp
NEW YORK (Reuters) - The U.S.
transportation sector, which many see as a proxy indicator of the
economy's health, has retreated 2.3 percent from its Sept. 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 <AAPL.O> and
Amazon.com <AMZN.O>, but the sector could be showing cracks in what
analysts and the U.S. Federal Reserve characterize 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 <.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 <.DJI>
has moved in the opposite direction. The Dow reached its most recent
all-time high on Tuesday, 13 trading days after the DJT's Sept. 14
record.
Diverging highs between the two indexes can signal growing market
instability. Similar divergences occurred leading into the recessions of
2001 and 2008-2009, 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 2 or 3 percent in the near future, you would call that a bearish
non-confirmation."
On Thursday, both indexes closed lower, with the DJT slipping 0.4
percent and the Dow Jones Industrial Average dropping 0.75 percent.
Delta Air Lines Inc <DAL.N> is due to report on Oct. 9, a week after a
lackluster forecasts from the company and its peer United Continental <UAL.O>
pulled U.S. airline stocks lower. The bulk of the companies in the DJT
are expected to post results in the latter half of October.
FedEx Corp <FDX.N>, the first in the group to post quarterly earnings on
Sept. 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 (NAFTA) has boosted railway stocks, looming tariffs threaten
to increase the cost of transporting goods and services, further testing
other DJT constituents.
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A street sign for Wall Street is seen outside the New York Stock
Exchange (NYSE) in Manhattan, New York City, U.S. December 28, 2016.
REUTERS/Andrew Kelly

"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
United States."
Analysts see costs of transportation fuels, which include gasoline, diesel and
jet fuel, continuing to climb due to tightening supply and increasing demand.
Rising fuel costs are "depressing stocks that make up the transportation index,"
Baumohl added.
Brent Crude prices <LCOc1> have risen nearly 27 percent since the beginning up
the year and energy analysts see the trend continuing well into 2019.
"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 dollar could also pressure transportation companies as American
goods grow less affordable to foreign consumers, which might result in fewer
shipments abroad.
The dollar index <.DXY>, which measures the dollar against a basket of major
world currencies, has risen almost 4 percent so far this year.
"The net effect is that (the strong dollar) could impact the transportation
index over the course of the next 12 months," Baumohl said.
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.
(Reporting by Stephen Culp; additional reporting by Terence Gabriel; Editing by
Alden Bentley and David Gregorio)
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