When the chief executive officer of FedEx Corp. gives an earnings forecast, people sit up and take notice.
It's not because Frederick Smith is particularly prescient. It's because FedEx is on the bleeding edge of the economy.
Yesterday, the package shipping company said its earnings for the current quarter would be just 30 to 45 cents (U.S.) a share, or about half what analysts had been expecting.
Rising fuel costs took some of the blame, but the dismal outlook is mostly because shipping volumes are heading down.
And when shipping volumes are down, the economy is in the dumps, providing more angst about whether the stock market's remarkable gains since early March can be sustained without signs of an improving economy.
Until recently, the stock market was moving on the green shoots theory, which goes: Signs of economic stability, or even a slower rate or deterioration, are enough to send stocks soaring.
But now, with major indexes up about 40 per cent from their March lows, investors want more than just green shoots, which helps explain the recent bout of stock market volatility.
"The selloff over the past couple of days in the stock market suggests that we need to see green stalks, not just green shoots," Ed Yardeni, president and chief investment strategist at Yardeni Research, said in a note released yesterday.
FedEx's forecast yesterday was certainly no green stalk. During the rally that began in March, its shares surged 80 per cent by early May as investors bet that a full financial meltdown and economic depression were not in the works. That's about double the move of the broad S&P 500 over the same period, and it reinforced the belief that freight haulers are barometers for the global economy.
"They are a reflection of consumer conditions," said Morgan McGowan, assistant economist at Moody's Economy.com. "The companies involved operate with a combination of air and ground, and even rail shipping as well. So they give a broad range of the different types of shipments that are going out."
Now, though, the barometric reading has changed as investors lose patience over the lack of hard evidence of an economic recovery. FedEx shares have fallen 17.8 per cent over the past month - worse than the broader market - and have sent some strategists to the Dow Theory, a technical indicator that gets some respect from those who sneer at technical analysis.
According to the theory, an upward move by the 30-member Dow Jones industrial average means nothing unless the 20-member DJ transportation average also moves up. The reason? The industrials make the stuff that the transportation companies haul. If there's no hauling, then there probably isn't a lot of demand for the stuff being made.
Lo and behold, the transportation average - which includes Burlington Northern Santa Fe Corp., Union Pacific Corp. and FedEx - has hit hard times, tumbling 6.6 per cent since last Thursday.
The industrials are now playing catch-up: The index began its descent on Monday and has since fallen 3.4 per cent - and the Dow Theory hints at more trouble ahead unless the economic news starts pointing toward sunnier days.
"Until now, 'less bad than expected' has been enough for investors," John Hussman of Hussman Funds, said in his weekly letter to clients. "At this point, however, stocks are priced to require an economic recovery."
Some observers are skeptical such a recovery is in the works before the end of the year. David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates, rattles off reasons why: U.S. industrial production is still contracting, employment continues to fall and average weekly earnings fell in May for the second time in three months. "Well, we can forget about calling for an end to the recession," he said.