Skepticism and confusion over trade deal, flattening yield curve fuel growing concerns over economic slowdown
The Dow Jones Transportation Average tumbled to its biggest-ever point drop, fueled by growing fears of an economic slowdown.
The Dow transports DJT, -4.39% tumbled 476.37 points, or 4.4%, with all 20 components closing lower. The previous biggest-ever point decline was 445.16 points on Oct. 10. At its intraday worst, the index was down as much as 565.23 points, or 5.2%.
Factors contributing to the selloff include increasing doubts over the significance of the U.S.-China trade war truce agreement, amid confusion and skepticism over exactly what the agreement entails.
In addition, a rapidly flattening Treasury yield curve fueled fears that recession was on the horizon, as an inverted yield curve — when yields on longer-dated Treasurys fall below yields of shorter-term Treasurys — has preceded previous recessions. Some parts of the curve are already inverted, as the 5-year yield is below the three-year yield. See Bond Report.
Many on Wall Street view the DJTA as a key economic indicator, because the index helps gauge how consumers and businesses are actually taking what companies are making.
Meanwhile, the Dow Jones Industrial Average DJIA, -3.10% dropped 799.36 points, or 3.1%, while the S&P 500 index SPX, -3.24% shed 3.2% and the Nasdaq Composite Index COMP, -3.80% lost 3.8%. See Market Snapshot.
Within the DJTA, the biggest drags were the shares of UPS UPS, -7.37% sank 7.4%, the biggest decline since January 2015, and FedEx FDX, -6.31% tumbled 6.3% to suffer the deepest decline since March 2013. The stocks’ combined price declines shaved 140 points off the DJTA’s price.
Morgan Stanley analyst Ravi Shanker cut his price target on UPS to $87 from $92 and on FedEx to $230 from $240, saying he believes the market is missing the risk Amazon Air poses” to the companies. He kept his underweight rating on UPS and his equal weight rating on FedEx.
Although the rollout of Amazon.com Inc.’s AMZN, -5.87% Amazon Air is still in the early innings, Shanker estimates a 2-to-3 percentage points impact on UPS and FedEx domestic air volume growth already, with more erosion expected as Amazon Air is built out.
Separately, UBS analyst Thomas Wadewitz downgraded a number of trucking companies, citing concerns that earnings for the current quarter may not be good enough to boost the stocks after the “peak season tightening” in the freight market was more muted than expected.
Wadewitz cut his ratings on Werner Enterprises Inc. WERN, -4.41% Knight-Swift Transportation Holdings Inc. KNX, -9.86% and Hub Group Inc. HUBG, -10.11% to neutral from buy, while slashing his price target on Werner’s stock by 14% to $36, on Knight-Swift by 16% to $36 and on Hub by 24% to $48. He also lowered his targets on Schneider National Inc. SNDR, -9.47% by 16% to $26 and on J.B. Hunt Transport Services Inc. JBHT, -4.17% by 14% to $124.
“We believe that the combination of incremental expansion capacity and increasing risks to freight demand point to a softer truckload pricing environment in 2019 which could result in either low single digit pricing gains or a modest decline in rates in the 2019 bid season,” Wadewitz wrote in a note to clients.
J.B. Hunt’s stock, a DJTA component, fell 4.2%, Werner’s shares shed 4.4% and Hub’s stock plunged 10%.
Airlines shares also dropped, with American Airlines Group Inc. AAL, -7.47% shedding 7.5%, Delta Air Lines Inc. DAL, -5.29% dropping 5.3%, United Continental Holdings Inc. UAL, -4.69% losing 4.5% and Southwest Airlines Co. LUV, -2.60% falling 2.6%.
