Transport stocks are reminded of darker days

Shipping demand is declining, reminding transport and freight stocks of a dark period called 2019 — when the shipping market collapsed despite a strong 2018.

Transport stocks took a beating during this period — with transportation giant FedEx (NYSE:FDX) losing over half its value between 2018 and 2019. Now they’re getting flashbacks as shipping demand falls…

An end to the shipping nightmare?

In the past two years, all transport companies could think about were massive backlogs, port jams, and rising freight prices.

• Shipping container prices jumped nearly 7x (per the Freightos Baltic Index) over 18 months since the start of COVID.
• The iShares US Transportation ETF (BATS:IYT) rose 25% in 2021 as the industry benefited from strong demand and rising prices.

Shipping prices are finally starting to cool off. Since last September, shipping container prices have fallen 16% from their peak, as consumer demand calms.

• US consumers have already reduced spending from inflation — or shifted spending from goods to services.
• According to the Logistics Managers’ Index Report, retailers are left “with more inventory than they know what to do.”

Forecast: Freight-ening recession

These factors have industry vets preparing for a sharp downturn in the transport industry. But lower demand won’t be the only problem.

Transport companies will also have to manage higher expenses due to extra capacity added in the past two years (FreightWaves).

• Since COVID started, the number of trucks has increased ~10%.
• Fuel prices — which make up the trucking industry’s largest variable cost — have also jumped.

Bank of America analyst Ken Hoexter sees “deteriorating demand outlooks and rapidly falling freight rates.” As a result, BoA downgraded nine transport stocks, including UPS, Canadian Pacific Railway, Union Pacific Corp, Saia, TFI International and ArcBest Corp (MW).

Investors: 2019 vibes

In 2018, there was a similar pattern of strong consumer demand, along with logistics firms overspending on extra capacity to meet that demand.

• But in 2019, a trade war between China and the US-led to lower consumer demand — leading to a 20%+ decline in the S&P 500 Transportation Index.
• Per FreightWaves, the trucking and freight industry could find itself in a similar position if demand drops below pre-COVID levels.

The transport industry is seen as a leading indicator of consumer demand — i.e., higher shipping demand signals higher consumer demand.

The reverse is also true — with lower shipping demand signaling weaker consumer spending. The silver lining — lower demand could help tame inflation.