Why Industrials Led the Dow Downward

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 (NYS: 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 (NAS: WPRT) is no exception. Westport designs engines that run on cheap, clean natural gas, primarily for heavy-equipment manufacturers such as Terex and Caterpillar (NYS: 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 (NYS: FDX) and major railroad Norfolk Southern (NYS: 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.

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