[Excerpt from The Pickett Line February 2021 Issue]
As we cross the halfway mark of the quarter, the case for Q4 2020 representing this cycle’s inflationary inflection point has only strengthened. If the US TL spot market cycle were a literal roller coaster, this would be the time in the ride where, after a rickety ascent high up the first hill of the wooden track, the car has just tipped over the peak and your view has suddenly changed from the bright blue sky above to the steep drop and the tangled path of track now in front of you. Only in this case, our vision of what lies ahead remains obscured by a complicated array of often conflicting market signals as well as our collective tendency to overweight our most recent observations and experiences as we look to predict what comes next. Or in other words, our heads remain in the clouds after the euphoric ride to the top (that is, if you are on the sell side) and we can therefore envision only more sunny skies ahead. But as we begin our journey down the other side of the hill, it is also important to remember that our metaphorical roller coaster is a slow one – perhaps painfully slow for some riders. On this ride, we won’t likely reach negative Y/Y territory until Q3 and it will take a full year before we reach the bottom of our hill, our next inflection point, and the start of the next rickety climb higher.
Recall that as we closed out 2020 on inflection watch and preparing for the transition from the 1st quarter of the US TL rate cycle to the 2nd, the biggest question mark was whether Q4 2020 would mark the turn or whether we would get an unexpected inflationary tailwind from positive vaccine news and therefore an accelerated reopening of the US economy in Q1 2021 that would prop the market up just a little bit longer. Though in hindsight, a repeat of the Q1 2014 polar vortex that kept broad sections of the US on ice in a prolonged deep freeze (sound familiar?) should have been offered as another example of an inflationary market anomaly that could do the same thing. In either scenario, the positive demand and/or negative supply dislocation, if of sufficient magnitude and duration, would have the potential to artificially stunt the normal cycle to produce a temporary kink in the rate line similar to major historical market events like Superstorm Sandy in Q4 2012, Hurricanes Harvey & Irma in Q3 2017, and the flash COVID-19 industrial crash of Q2 2020. Unfortunately, the macroeconomic data through January, while more positive than negative, suggest that any upside consumption surprises will have to wait until next quarter at earliest to reveal themselves. And fortunately, with warmer temperatures forecasted for the weeks ahead, the effects of the current deep freeze – as disruptive and tragic as they have been in Texas and across much of the country – are not likely to linger long enough for a repeat of 2014.
So, as it stands through the midpoint of the quarter, our DAT TL Spot Index has faded lower to +31.5% Y/Y vs. the January read of +38.3% and now well below the current Q4 2020 high water mark of +40.2% Y/Y. And while not likely, it is certainly possible for spot rates to rise sequentially high enough from here through the back half of the quarter to overtake Q4 and defer our inflection point. Though the index would have to rise $0.42/mile or +20% M/M in March to take the Q1 average to +40.2% Y/Y – which seems like an awfully tall order, all things considered. So for the time being, assuming the most likely scenario comes to pass and the Q4 2020 inflection point is confirmed, our 2021-25 forecast remains unchanged which projects a rapidly decelerating spot market from here that flips Y/Y deflationary by Q3. However, given the COVID market cycle anomaly in Q2 2020, where the otherwise pre-COVID inflationary cycle trajectory was stalled for a quarter as both consumption and shipping patterns shifted violently in response to nationwide virus mitigation efforts, the abnormally low Y/Y comp could show as a brief pause in the slope of the correction or even a temporary spike higher in Q2 this year. But this would likely only lead to a more dramatic move lower, by comparison, in Q3.
And while our 2021 US economic outlook remains at least moderately bullish with consumer spending poised to accelerate higher from here – fueled by additional fiscal stimulus, favorable monetary policy, more people getting back to work, and record household savings rates – we believe a significant portion of that incremental spending will be in the Services sector as that segment of the economy reopens, which tends not to be as TL freight intensive as the Goods sectors that have boomed throughout much of the COVID recession so far. So in contrast to past recoveries, the rise in consumer spending may not result in the same corresponding acceleration in industrial production and therefore US domestic TL freight demand. But even if it did, the rolling wave of spiking Y/Y net Class 8 Tractor Orders over the last 6+ months (with no sign of a slowdown yet) remains a signal that, just as in past TL market cycles, whatever growth in TL demand we do see will be dwarfed by an even greater increase in TL supply entering the market – and Yes, that means drivers too. So it’s quite possible that the Shippers and Freight Brokers operating in the segments most favored by any increases in discretionary consumer spending and/or government-sponsored recovery programs – like infrastructure and clean energy – could enjoy a welcome surge in demand in the midst of an increasingly deflationary Spot TL market. And for those among them that have positioned their supply chains to capitalize and have built the operational agility to flex with the market, the stage will be set for at least a couple of quarters of potentially stellar relative earnings performances in the back half of the year before the rest of their competitors are able to catch up.