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Two key indexes diverge in July as Trump trade makes way for global bets


Truck on road

Martyn Goddard | Getty Images

Dow transports and Dow industrials diverged in July: here’s what it means.

While transports fell 4 percent last month, the Dow industrials rose almost 3 percent. This divergence is notable since transports had just hit new highs. But across the board, airlines, railroads, truckers and logistics firms declined.

What’s going on? You can only stretch a rubber band so far. For transports, there is some disappointment about the Trump agenda mixed in with better opportunities overseas, and lower business from key sectors like retail, autos and oil. Throw in some issues around pricing and capacity, and there’s plenty of reasons for a divergence:

1) Investors piled into transports as a play on a Trump rally (infrastructure) and an improving economy — but prices went too far. The Dow transports rose more than 15 percent in less than one month after the election. The iShares Transportation ETF saw its assets under management increase almost 60 percent after November. That began moderating in April and has been drifting lower ever since then — a sign investors are not as big on the Trump play and that prices were too high.

2) There are bigger opportunities in other, more global industrials. With the exception of the airlines, the transports are largely a play on the U.S. — and investors see far more opportunity in global Industrial stocks. It’s no secret that money has been pouring into European and emerging market funds this year (see my Trader Talk yesterday on July ETF flows). Industrials that play into those markets — think Caterpillar and Boeing, for example — are on fire because those markets have been improving.

3) Sectors within the transports have specific problems:

a) Airlines have had capacity issues and margins are at cyclical highs. You can also throw in some pricing issues, particularly between United and Frontier Airlines.

b) Truckers also have lingering concern about capacity growth, as well as weaker pricing, and the poor state of retail is also no help.

c) Railroads had high expectations earlier in the year for volume growth and pricing, but that is proving misplaced. Look at today’s news: Ford, General Motors and Chrysler all reported July auto sales well below expectations, and on an up day all three railroads (CSX, Norfolk Southern and Union Pacific) are down. Second, rails also still have significant exposure to energy that is weighing on them. While not a railroad, Kirby provides marine transportation for oil companies, and that stock dropped big last week on disappointing revenue, as prices are under pressure by too much capacity.

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