According to IMF and the OECD, 80% of the world’s major economies are at full employment. Encouraged by immediate expensing and repatriation of cash from overseas, the U.S.’ traditionally robust consumer demand is now expected to be supplemented by productivity improving capital investment. Transportation investment markets follow traffic demand and with economic growth on the upswing investment fundamentals are favorable.

Aviation Industry

Both Boeing and Airbus single-aisle aircraft are ‘flying high’ with performance metrics investors most care about: cash generation. With order backlogs in place, new equipment deliveries are expected to surpass those of 2017.

The competition between the 737 MAX and A321neo continues. Boeing’s 737 family brought in 745 net firm orders in 2017, up from 550 in 2016; for the 787 Dreamliner family, net firm orders in 2017 were 94, up from 58 in 2016; and, for the 777 family, 60 net firm orders, compared with 17 in 2016. Boeing delivered a record 763 planes in 2017; Airbus 718, and both the A320neo and A321neo order books improved.

However, problems with Pratt & Whitney engines on the A320/321neo Airbus models continue. Engine component failures are causing some of these aircraft to be grounded while engines are repaired or replaced. Both the Boeing and Airbus single-aisle aircraft types will support strong secondary markets long into the future.

Rail Industry

While the broad rail industry environment remains stable, carload traffic (except for intermodal) remains challenged (crushed stone, sand, gravel, petroleum, and lumber and wood products saw carload gains in January). With a tight trucking market, Washington’s infrastructure planning, growing petrochemical production, and shale oil’s return, the Class Ones expect to work this year to build and sustain an ongoing business. Questions remain with NAFTA and coal.

Commodity Pricing

China continues to be a major force in commodity pricing. Price developments in industrial metals will be largely determined by Chinese demand (steel, aluminum, copper). In addition, rising Shale Oil production will act to control crude oil pricing.

Interest Rates

Recent moves to eliminate excessive government regulation (and the passage of tax reform) are acting to boost economic growth. With stronger growth and a tightening job market, interest rates are expected to rise at both the short and the long end of the yield curve. The result is likely to lead to market stress as increasing inflation will prompt the Federal Reserve to raise interest rates even faster than currently expected. Geopolitics and the midterm elections are risks.

Tomorrow’s Markets

For 2018, we expect the world’s major economic regions will exceed expectations. The U.S. expansion will enter its tenth year in March. If it continues through August, it will officially become the longest in history. With the Federal Reserve shrinking its balance sheet and raising rates, market volatility has returned.

Are we at a peak? No.

A recession is not on the near-term horizon as financial conditions have not shown any sign of significant deterioration.

Consider that an investor’s natural aversion to risk often leads to taking more risk at market highs and less at market lows. Today’s environment requires a special degree of foresight and judgment. Attention to economic fundamentals, customer relationships, opportunities, and a focus on long-term results are key. The ultimate risk is not in what kind of investments you have, but in what kind of investor you are. Long-term returns are available to those who focus on disciplined and active portfolio management.

Transportation specialist knowledge is powerful. For uncommon sense call RESIDCO.

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