C.J. Lawrence Weekly Market Comment – Freight Economy Remains Strong Despite Tariff Uncertainty
International trade watchers marked Sept 6 on their calendars as the conclusion of the public comment period for the U.S. administration’s proposed $200 billion in new tariffs on Chinese imports. The new tariffs could be imposed any time thereafter and come on the heels of $50 billion in new tariffs that were phased-in this summer. China responded in kind to the first round with $60 billion in new import tariffs of their own and are threatening to retaliate if the U.S. moves forward with the next round. There appear to be only token efforts by both countries to negotiate through the current stalemate and thwart the next round of restrictive trade measures. Meanwhile, on other trade fronts, the U.S. and the European Union, which reached trade agreements in principle this spring regarding non-automotive goods, are now considering talks to remove all auto-related tariffs. A U.S.-Mexico trade deal also looks like it is in the offing, with Canada likely to join tri-partite discussions in the next week or two.
The shifting trade landscape is causing some consternation among U.S. manufacturer and shipper groups who fear disruption in purchasing patterns, and among some consumer groups who are forecasting higher prices on imported goods because of China tariffs. But in general, the stock market’s reaction has been one of optimism. Despite the uncertainty and trade posturing, the S&P Road and Rail sub-index, which contains four railroads and a long-haul trucker, is up almost 22% in the last six months. Financial performance for the group has been steady with earnings per share growth for the index forecasted to climb 40% this year on the back of increased freight flows, improved pricing, and corporate tax reform. Analysts expect that earnings per share will continue to experience healthy growth in 2019 and 2020 with earnings estimates up 12.3% and 12.7% respectively. Supporting those views are robust bulk and intermodal freight flows through U.S. ports and across the country’s freight transportation network.
The American Trucking Association reported recently that year-to-date truck tonnage, on a seasonally adjusted basis, is up 8% from last year’s level with strength across the manufacturing, retail, and construction segments. That sentiment was echoed by the American Association of Railroads, which last week reported 3% year-to-date carloadings growth, with strength in Metallic Ores and Metals (+4.1%) and Petroleum and Petroleum Products (+14%). Year-to-date intermodal traffic is up 5.1% from last year. At the macro level, U.S. imports, exports, industrial production, and capacity utilization have all advanced during the past six months. The Baltic Dry Index, which tracks rates for ships carrying dry bulk commodities, and which is often used as a proxy for global trade and global economic health, is up 43% during the past six months. Trade uncertainty is often cited as a primary risk to U.S. and global economic growth and to the U.S. stock market. Yet the trade landscape during the past six months has been anything but certain and predictable, and many of these important metrics continued to advance. Freight flows have a way of flowing like water, finding the paths of least resistance. Should the former NAFTA participants work through new deals, the U.S.-EU trade discussions solidify, and the U.S-China trade relationship stabilize, the positive momentum in goods and freight transportation could advance to a new higher level.