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Transport Stock Declines Outpace The Broader Market On Retaliatory Tariffs

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Transport Stock Declines Outpace The Broader Market On Retaliatory Tariffs

In heavy trading on Monday, May 13, the Dow Jones Industrial Average traded off more than 600 points (more than 2 percent), the Dow Jones Transportation Average Index was down almost 3 percent and the S&P 500 was down nearly 2.5 percent. While the degradation was seen across most sectors, the transport sectors saw large declines.

Truckload (TL) carriers and less-than-truckload (LTL) carriers declined 4 percent, railroads were down more than 2 percent and airfreight companies were down almost 3 percent.

The U.S. Trade Representative announced that the United States raised tariffs on $200 billion of Chinese-made goods from 10 percent to 25 percent on Friday, May 10. The new duties will not solely be based on the entry date to the U.S., which is the normal practice. Goods exported from China before May 10 and entering before June 1 are unaffected by the new tariffs, but anything exported after May 10 or arriving after June 1 will incur the 25 percent tariff.

In response, the Chinese Finance Ministry said it would raise tariffs on $60 billion of U.S. imports with duties as high as 25 percent, up from the prior 5 percent to 10 percent levels.

"The President also ordered us to begin the process of raising tariffs on essentially all remaining imports from China, which are valued at approximately $300 billion," U.S. Trade Representative Robert Lighthizer stated on Friday, May 10.

In a briefing on May 13, the President referred to being authorized to implement another round of tariffs on $325 billion of goods up to a rate of 25 percent. The President said that total tariffs on Chinese goods stand at 25 percent on $250 billion in goods.

The latest move comes just days after the May 10 commentary from the White House pointing to constructive progress in the recent talks with the Chinese trade delegation.

Recent stock performance of selected transportation companies – Seeking Alpha and FreightWaves

Holding up through a largely in-line earnings season (trading from April 15 to May 3 – beginning of transportation earnings season to the last trading session prior to the tariff announcement), the acceleration in tariffs from both countries is proving too much for investors to handle when it comes to the transportation stocks. Many companies spoke specifically to the headwinds in U.S.-China trade relations as a primary reason first quarter 2019 earnings weren't better. Further, tepid freight demand, excess capacity and softer spot prices present obstacles to transportation stocks.

While the first quarter was plagued by extended network outages in all transportation modes due to weather, many companies mentioned that the typical uptick in seasonal freight demand wasn't occurring.

"Demand in One-Way Truckload moderated in the last three weeks of March relative to our expectations, and that trend has continued so far in April, said Werner President and Chief Executive Officer Derek Leathers on the company's April 25 earnings call.

Additionally, excess truck capacity is weighing down pricing, which presents an obstacle to future rate negotiations (the year-over-year comparisons are more difficult for the TLs as the year progresses) and has had a negative impact on demand for intermodal movements.

Intermodal Outbound Tender Rejection Index (USA) – SONAR

"My expectation is that pricing conditions for truck services in the 2019 second quarter will continue to come under pressure with little change in the level of truck capacity available in the marketplace. Assuming those capacity market conditions continue throughout the rest of the second quarter, I expect 2019 second quarter truck revenue per load to be lower than the 2018 second quarter in a high single-digit percentage range," said Landstar's President and Chief Executive Officer Jim Gattoni.

Without a material seasonal uptick, there is growing concern that earnings guidance may be curtailed. Some companies reeled in their full-year expectations when they reported first quarter results, but those were largely from transportation companies that underperformed in the first quarter. Many companies maintained their original outlook for 2019, which may not reflect transportation fundamentals if real improvement in freight demand doesn't begin to take shape.

Outbound Tender Reject Index (National US Van) – SONAR

The U.S. traded an estimated total of $737.1 billion in goods and services with China in 2018 according to the United States Trade Representative. U.S. exports accounted for only $179.3 billion of the total amount.

The next opportunity for a trade resolution with China is not likely to come until next month's G-20 summit when President Trump is expected to meet with Chinese President Xi Jinping in Japan.

The post Transport stock declines outpace the broader market on retaliatory tariffs appeared first on FreightWaves.

Image sourced from Pixabay

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