Please ensure Javascript is enabled for purposes of website accessibility

Why Industrials Led the Dow Downward

By Daniel Ferry - Updated Apr 7, 2017 at 12:50PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Bad news for manufacturers and railroads caused these sectors to plummet.

Despite indications that housing might be picking up in the United States, industrials ended the week sharply down while markets were overall flat. Reports of weak manufacturing activity and concerns over the state of international trade caused the capital goods and transportation sectors to significantly underperform broad indices such as the Dow Jones Industrial Average.

The announcement of a new round of quantitative easing, an academic term for printing money to buy debt in order to bring down long-term borrowing costs, triggered a temporarily rally in most stocks last week, but industrials gave up those gains and more on a few gloomy pieces of information.

Bad news from regional Feds
First, last week the Federal Reserve banks of New York and Philadelphia both issued reports showing that manufacturing activity in their respective regions was down, continuing a national trend. This is a general symptom of overall weak economic growth in developed economies, and as a result heavy-equipment makers that operate in developed markets, such as Terex (NYSE: TEX), are facing a more difficult sales environment. Low consumer demand ultimately means that manufacturers have no need to invest in building new capacity, which hurts companies like Terex, down 7.3% this week.

Companies with high expectations typically take the biggest hits from harsh doses of reality, and Westport Innovations (Nasdaq: WPRT) is no exception. Westport designs engines that run on cheap, clean natural gas, primarily for heavy-equipment manufacturers such as Terex and Caterpillar (NYSE: CAT), down 1.5% this week. With sky-high valuations, any hit to expectations will send Westport shares tumbling, and this week they were down more than 12%.

Trade troubles
Even though oil prices reached a six-week low, transportation companies saw declines this week because of deteriorating trade volumes. Transporters got a one-two punch as global package shipper FedEx (NYSE: FDX) and major railroad Norfolk Southern (NYSE: NSC) both lowered their earnings estimates within 24 hours of each other. FedEx, which has some of the best data in the world over product shipments, announced that it believed economic growth to 2013 would be more modest than the U.S. Federal Reserve anticipates. That move pushed shares of nearly every logistics and transportation company down, with FedEx itself down more than 6% for the week.

Norfolk Southern seemed to confirm this gloomy pronouncement by advising investors that its own earnings would come in below analyst estimates because of low volume. All Class I railroads have been under pressure because of declining coal volumes over recent years, but Norfolk Southern's announcement spooked investors and sent shares down nearly 13% for the week, the industry's most drastic decline. Other railroads and shippers weren't far behind, however, as investors surmised that other freight movers would be suspect to the same pressure. Railroads are facing a number of intriguing opportunities and challenges, however, and a thorough analysis can be found here.

Transportation companies are sensitive to energy prices for their fuel costs, while manufacturers like Westport Innovations and Caterpillar are banking on cheap natural gas to power their vehicles. Natural gas might be experiencing rock-bottom prices now, but one Motley Fool analyst expects prices to start rising by 2014. Luckily for investors like you, we've identified one stock you need to own for the natural gas revolution. This report is free, but it's available for only a limited time, so get your copy today.

Fool contributor Daniel Ferry owns shares of Westport Innovations and Caterpillar. The Motley Fool owns shares of Westport Innovations. Motley Fool newsletter services have recommended buying shares of FedEx and Westport Innovations. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Norfolk Southern Corporation Stock Quote
Norfolk Southern Corporation
NSC
$260.21 (1.02%) $2.64
Caterpillar Inc. Stock Quote
Caterpillar Inc.
CAT
$194.00 (1.72%) $3.28
FedEx Corporation Stock Quote
FedEx Corporation
FDX
$229.24 (-1.38%) $-3.21
Terex Corporation Stock Quote
Terex Corporation
TEX
$37.15 (1.81%) $0.66
Westport Fuel Systems Inc. Stock Quote
Westport Fuel Systems Inc.
WPRT
$1.30 (-2.26%) $0.03

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
390%
 
S&P 500 Returns
125%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/11/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.