What happened

Shares of Union Pacific (NYSE:UNP), Canadian National Railway (NYSE:CNI), CSX (NASDAQ:CSX), and Kansas City Southern (NYSE:KSU) all fell more than 10% apiece on Monday, and shares of Norfolk Southern (NYSE:NSC) were down more than 8%, driven down by growing concern that the COVID-19 coronavirus would push the economy into a recession.

Railroads and other shipping stocks tend to move with the overall health of the economy. If economic output is slowing, it is going to be hard for these stocks to avoid being derailed.

UNP Chart

Railroads year to date data by YCharts.

So what

A weekend of scary coronavirus-related headlines had investors scrambling for the exits on Monday, with fears growing that the economic impact of the outbreak will be more severe and last longer than originally anticipated. There is growing risk that the U.S. economy will fall into a recession due to the virus, which would eat into imports and exports and with it bring down the intermodal businesses of railroad companies.

The sector was also likely hit due to the overnight plunge in oil prices, which could both hurt demand for coal -- a staple cargo for many railroads -- and limit demand for oil transport from U.S. oil fields. Low oil prices also tend to make trucking more competitive with rail, as it helps negate railroads' efficiency advantage.

Train tracks at a crossing.

Image source: Getty Images.

Coronavirus fears are adding to what was already a tough shipping market. The Cass Freight Index, a closely watched indicator of trade volume, was down 9.4% year over year in January. Any hope of that trend reversing and volumes moving toward positive territory is fading as the number of coronavirus cases increases.

Now what

The outbreak can't destroy the railroads, but it can and increasingly likely will cause the companies to report weak earnings in the current quarter and probably the second quarter as well. The best-case scenario at this point is a second-half recovery, and even that is uncertain.

It is hard to call a bottom in a time of such market chaos. As new coronavirus cases continue to be announced in the days to come, stocks could fall further. But the overall long-term outlook for the railroads is unchanged. For those willing to look past the near-term uncertainty and buy quality operators, companies like Union Pacific and Canadian National are beginning to look like intriguing buys at these levels.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.