Over the last couple of months in Ahead of the Curve I’ve pointed to several indicators showing that the market is overvalued. Too much positive sentiment, coupled with massive debt loads and household liquidity stretched to the max, has exacerbated the situation.
But, these situations can exist for a long period of time. When Alan Greenspan told the televised world in 1996 that an “irrational exuberance” was unduly inflating asset values, it took another four years for the Internet Bubble to finally burst.
Was he wrong? No! He was dead on the money! Greed ultimately just kept pushing the bubble past its limits.
So while the indicators I’ve been pointing to suggest we’re in the risky end of the spectrum… they’re not a catalyst in themselves.
Now, that catalyst is coming. And it starts with transport stocks.
As the chart below illustrates, the sector is starting to roll over. It’s been “in the green” for the past two years, but now we see it dipping lower.
The last time this happened, as you can see, this sector didn’t recover for about two years.
After that, the sector was very healthy for more than two years. But now that tailwind is changing course.
The impact of softening demand — specifically global demand — is beginning to manifest itself in weaker transportation stock prices. Considering this sector relies on shipping goods around the world, this is detrimental. Already the sector has lagged by more than 7% just this year.
What’s more is that transport stocks face numerous headwinds today. Rail stocks have tremendous exposure to commodities, which have already started their bear market well ahead of broader indices. Air freight stocks are facing excess capacity, and labor pressures and port restraints are pinching the trucking sector.
Softening global demand only makes the situation worse. With China in free-fall, their exports have plummeted 15% just in March, while imports fell nearly 13%.
The World Bank has started to downgrade its outlook for Asian growth as a whole, cutting forecasts across the board. Since Asia has been the engine of worldwide growth for several years now, this slowdown will start to filter through the entire global economic system.
That will leave fewer places for companies to hide, making them more vulnerable to missing revenue and earnings estimates. As a result, investors will begin to lower their expectations.
When investors shift their focus to the fundamentals and see how everything is pointing down, expect to see stock prices follow.