The stock market has been choppy all week, and declines finally gained speed on Thursday. Investors are nervous about a whole host of issues, ranging from the pace of the economic recovery and the future path of interest rates and inflation to current valuations of the market in general and high-growth stocks in particular. At the close, the Dow Jones Industrial Average (DJINDICES:^DJI) finished down 260 points to 34,422. The S&P 500 (SNPINDEX:^GSPC) fell 37 points to 4,321, and the Nasdaq Composite (NASDAQINDEX:^IXIC) dropped 105 points to 14,560.

A large part of the stock universe is sensitive to cyclical movements in the business cycle. Those stocks often rise and fall sharply when macroeconomic conditions appear to be in flux, and certain industries tend to be more cyclical than others. On Thursday, railroad stocks found themselves in the crosshairs of bearish sentiment, and it's unclear whether the drop will prove to be a bargain opportunity or just the beginning of a more extensive move lower for the companies.

Switch between multiple railroad tracks.

Image source: Getty Images.

Big hits for railroads

Just about every railroad stock trading on U.S. markets saw substantial declines on Thursday. Norfolk Southern (NYSE:NSC) dropped more than 7%, while CSX (NASDAQ:CSX) experienced a 6% decline. Union Pacific (NYSE:UNP) fell 4%. Across the border, Canadian National Railway (NYSE:CNI) was able to get away with a drop of less than 1%, but Canadian Pacific (NYSE:CP) fell almost 6%.

The biggest decline came for Kansas City Southern (NYSE:KSU). The smaller railroad has been a takeover target with multiple prospective acquirers, and the drop of nearly 8% for Kansas City Southern seems in part due to worries that broader weakness among railroads could cause a deal to fall through.

The immediate catalyst for railroads declining appeared to be a report from The Wall Street Journal. The report suggested that the White House would issue an executive order that will direct federal agencies, including the Surface Transportation Board that oversees railroads, to take steps that will halt the trend toward consolidation and anti-competitive behavior throughout much of the transportation sector.

Implications for the rest of the stock market

With a relatively small number of railroads controlling much of the North American railroad market, one could easily argue that it's too late to expect success by seeking to prevent further industry consolidation. Moreover, seeing railroads as a separate industry that requires internal regulation ignores the fact that rail transport is only one part of the extensive logistics network that gets goods where they need to be. Any complete solution needs to recognize the role that trucking, air freight, and marine shipping play as well, and regulators have to understand that if those seeking transportation services have alternatives outside one narrowly defined industry, that can still support competition.

Nevertheless, the move is just the latest in a series of largely bipartisan government actions looking at merger and acquisition activity. Antitrust actions against major tech companies have been in the headlines lately, and high-profile investigations of tie-ups in the wireless network sector forced long delays before telecom companies could close on business combinations.

Going forward, investors will have to incorporate these attitudes whenever an acquisition is a planned exit strategy for a given company. If regulators get too strict, then shareholders might find that deal activity could dry up suddenly.

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.