Transport Stocks Fall, But Market Shrugs Off Broader Concerns -- 2nd Update
November 22 2017 - 5:34PM
Dow Jones News
By Michael Wursthorn
Shares of planes, trains and automobiles are skidding, and that
often spells trouble for the rest of the market. But some analysts
and investors aren't heeding the century-old warning sign this time
around.
The Dow Jones Transportation Average is on track for its first
quarterly decline in more than a year, as the index has fallen 2.9%
so far this quarter. The Dow Jones Industrial Average is up 5% the
final three-month period of the year.
The index of 20 of the largest U.S. airlines, railroads and
trucking firms is used by some in the market as a proxy to gauge
the health of the U.S. economy since those companies are
responsible for the vital movement of raw materials, goods and
people.
So when the index diverges from the broader Dow Jones Industrial
Average, some investors take it as a sign to sell. However, several
analysts and investors say the Dow transports' weak performance is
due to a spate of downbeat earnings rather than a deeper economic
funk.
Analysts specifically pointed to a series of hurricanes in the
previous quarter that disrupted thousands of flights among
airliners, including United Continental Holdings Inc., American
Airlines Group Inc. and Southwest Airlines Co., and caused service
disruptions for railroad operators and shipping companies at a time
when most transportation businesses are grappling with rising
costs.
"There's pretty good divergence there. But the latest pullback
in transports was more due to disappointing third-quarter
earnings," said Leo Grohowski, chief investment officer of BNY
Mellon Wealth Management, adding that airlines were particularly
weak.
Still, the quarterly decline in transport stocks is noteworthy
given how closely the two indexes tend to trade. Since 1900, the
Dow industrials and the Dow transports have traded above their
200-day trading average in tandem more than 50% of the time,
according to data from Ned Davis Research.
Airlines in the Dow transports were among the hardest-hit
stocks. Shares of United have fallen 12% since it reported earnings
last month. United said storms like Hurricane Harvey disrupted its
operations and caused it to incur higher costs, while the rollout
of new low-cost, no-frills fares, known as "Basic Economy," all
contributed to a drop in revenue, executives said while discussing
third-quarter results.
Both American Airlines and Southwest Airlines reported improved
revenue in the previous quarter, while maintaining prices that
helped offset rising fuel, labor and other costs. Still, the
hurricanes shaved off millions of dollars in profit and revenue at
both carriers. American shares have fallen 4.6% since it reported
earnings on Oct. 26, while Southwest has declined 3.6%.
Railroad companies haven't fared much better in recent months,
despite the double-digit gains they had already notched. Norfolk
Southern Corp. posted upbeat results last month, beating revenue
and profit estimates, yet its stock has fallen 2.6% since it
reported earnings on Oct. 25. CSX Corp. beat profit expectations
but saw revenue fall short due, in part, to service delays that
stemmed from the hurricanes and derailments. Its shares have fallen
3.5% since it released earnings Oct. 17.
Another big laggard in the index: Avis Budget Group Inc. The
car-rental company's shares tumbled 16% since it said on Nov. 6
that higher fleet costs and weaker international pricing had hurt
the car-rental company, causing it to miss earnings and revenue
expectation and lower its sales guidance for the remainder of the
year.
As the transports index lurches toward its first three-month
decline since the second quarter of last year, stock market
volatility has picked up slightly relative to much of the rest of
the year. That has created a better environment for stock pickers,
some investors added.
"Stock disparity is picking up and that's an opportunity for
active managers," said Jason Pride, director of investment strategy
at wealth-management firm Glenmede. "Stocks are showing signs of
moving away from one another."
Concerns around how Republicans proceed on their tax overhaul
contributed to recent declines in the Dow Jones Industrial Average,
causing the index to snap an eight-week winning streak and swing
between gains and losses in recent sessions. Sectors that had been
performing better earlier this year, such as industrials, are now
lagging, while concerns about the market's health picked up
following losses in the junk-bond market.
Lofty valuations, especially among technology companies that
have contributed significantly to the market's gains this year,
have also kept investors on edge, with some believing those stocks
could pull back on geopolitical concerns or due to developments in
Washington, D.C.
"The albatross for the market is valuations at this point," said
Terri Spath, chief investment officer of Sierra Investment
Management, an investment firm with $2.7 billion in assets.
"They've been too high for a while."
Write to Michael Wursthorn at Michael.Wursthorn@wsj.com
(END) Dow Jones Newswires
November 22, 2017 17:19 ET (22:19 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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