Shares of leading transport companies got a boost at the open Friday morning, part of a broader market jump, on improved chances of an economic stimulus package being approved and consumer sentiment holding up better than expected.
Shares of XPO Logistics (NYSE:XPO) opened up more than 10%, and shares of FedEx (NYSE:FDX) and United Parcel Service (NYSE:UPS) opened up more than 5%, on hope that the worst-case economic impact of the COVID-19 coronavirus can be avoided.
This was already shaping up as a challenging year for transport and shipping stocks even before the coronavirus outbreak, with fears growing that a slowdown in China and parts of the developing world could eat into global volumes. The Cass Freight Index, a closely watched gauge of shipping activity, fell 9.4% year over year in January, and investors are assuming activity continued to decline in February as the outbreak spread.
Shares of UPS are down 23% year to date, and XPO and FedEx are each down more than 27%, meaning the market is pricing in an extended downturn. So it is no surprise the stocks got a bit of a boost on suggestions that the eventual fallout from the outbreak might not be as bad as feared.
As expected, the University of Michigan Consumer Sentiment Index fell at the start of the month, to 95.9 from 101. But the fall was not as bad as what economists had predicted, and it's still near the average for all of 2019. Markets read that as a hopeful sign that consumer spending has not fallen off a cliff due to the novel coronavirus.
The stocks also benefited from a number of actions designed to reassure confidence in the economy. The New York Fed on Friday morning announced it would boost Treasury buying operations to try to support markets. And Treasury Secretary Steven Mnuchin appeared on CNBC, saying the White House is close to a deal with Congressional leaders on a stimulus package.
This is a volatile time, and until there is a sense that the coronavirus outbreak is under control, investors should expect these stocks to continue to trade up and down based on headlines. There is little doubt the outbreak will have some impact on shipping volumes, and therefore some effect on quarterly earnings. How severe that is or how many quarters will be affected remains impossible to know.
The uncertainty comes at a difficult time for FedEx and XPO in particular. FedEx had a miserable 2019 and had hoped to show a recovery in 2020, but could find it challenging to grow in a difficult environment. XPO is exploring the sale of one or more of its business units at a time when dealmakers could be gun-shy.
These are all solid companies with the wherewithal to ride out the crisis regardless of how long it lasts, and the potential to deliver strong returns for shareholders over time. For those able to ride out the turbulence, there is no reason to sell. Just be warned that the volatility is almost certainly not over.