To the growing bewilderment of skeptics, equities continue their rally, trading as if the recovery is nigh, there will be no second-wave lockdowns, and government largesse will offset unemployment.  

The S&P 500 closed at 3,232 on Monday, up 44% from its March 23 low and down less than 1% year-to-date (YTD), effectively erasing its losses for the year.

"The broader equity market is beginning to buy into the idea of a rapid recovery to the extent which just two months ago I would never have believed possible, and frankly [I] am still a little guarded," acknowledged Stifel shipping analyst Ben Nolan in a research note on Sunday.

"The confidence in a broader market recovery expressed by the sharp improvement in the S&P has not translated into nearly the same magnitude within the shipping equities," he said. "Average tanker names under coverage are down 33% YTD, average container names are down 31%, and average dry bulk names are down 41%.

"Transportation as a sector has lagged the broader market, but still, the S&P transportation index, which is mostly railroads, airlines, and trucking companies, is only down 7% through the year, so clearly [ocean] shipping is underperforming by any measure.

"If the broader equities are correct in predicting a rapid recovery of economic activity, shipping equities could be poised for a substantial catchup trade and outperformance," he concluded.

Tanker Stocks

Despite the adoration of many retail investors, tanker stocks remain far below where they started 2020. As of Monday's close, the largest listed names by market cap — Euronav NV (NYSE:EURN) and Frontline Ltd (NYSE:FRO) — were down 19% and 31% YTD, respectively.

Also, Libya, which is not bound by the OPEC+ agreement, resumed production at two fields, which had combined exports of 243,000 b/d last year, according to Argus Media.

Morgan Stanley issued a research report on Monday warning that crude prices are now at levels where "downside risks start to build again." At these prices, "much of U.S. shale is ‘in the money''' and the risk of OPEC quota compliance rises, said Morgan Stanley.

The price of Brent crude declined 3.5% on Monday and the price of shares of Frontline rose 10.2%, Nordic American Tanker Ltd (NYSE:NAT) 14.2%, and Scorpio Tankers Inc. (NYSE:STNG) 10.6%.

Dry Bulk Stocks

Unlike very large crude carriers, which are earning over triple what they did a year ago, large bulkers are performing very poorly. Dry bulk stocking picking is more of a "hope" trade.

Spot rates for Capesizes (bulkers with a capacity of around 180,000 deadweight tons) have doubled off painfully low levels over the past week to just $7,300 per day. This is well below breakeven, only half the level of rates at the same time last year, and only one-fifth of Capesize rates last September. 

Shares of the largest U.S.-listed Capesize owners, Star Bulk Carriers Corp. (NASDAQ:SBLK) and Golden Ocean Group Ltd (NASDAQ:GOGL), are down 40% and 29% YTD, respectively.

Capesize rates are heavily reliant on iron-ore export volumes from Brazil to China. On Friday, a judge ordered Brazilian miner Vale SA (NYSE:VALE) to halt operations at its Itabari complex due to a COVID-19 outbreak.

Itabari has a monthly output of 2.7 million tons. Concerns over continued coronavirus woes for Brazilian supply could convince more shipowners to keep Capesizes in the Pacific Basin, which would pressure Australia-China spot rates.