Why Shipping Stocks Skyrocketed Higher Today

By Markets Fool.com

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What happened

Shares of shipping stocks exploded higher today as investors bet the future of the industry is going to be brighter under a Trump administration. And the reaction was swift. As of 3:10 p.m. EST, shares of Diana Shipping Inc. (NYSE: DSX) were up 14.9%, DryShips Inc. (NASDAQ: DRYS) was up 73.1%, Seanergy Maritime Holdings Corp. (NASDAQ: SHIP) had risen 67.5%, and Danaos Corporation (NYSE: DAC) shares were up 39.6% on the day.

So what

There are a number of factors converging today to push shipping stocks higher. The first is speculation that a President Trump will spend billions of dollars on infrastructure programs, which will push commodities higher. Right now, the market's thinking is that increased spending will offset any negative impact from trade restrictions long touted by Trump on the campaign trail.

It's also likely investors are seeing a 20-point increase in the Baltic Dry Index to 1,065, the highest level since late summer 2015, as a positive sign. The Baltic Dry Index should give investors an idea of what rates for cargo ships are going for, so it's a proxy for their revenue. But the stock reaction is far greater than the index's move today.

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Now what

Everything driving shipping stocks higher today is built on speculation. There's speculation there will be an infrastructure bill, speculation the bill will lead to higher commodity prices, and speculation that higher prices will lead to more ocean-shipping demand. The problem is that none of those things is certain, and it's easy to argue that trade restrictions could be a big negative for shipping companies.

The reality is that shipping stocks are also bouncing off a fairly low base. Their stocks have been struggling for years, and even a small increase in profitability could lead to a big increase in their stock prices. Investors are still only building the increased stock prices on speculation that the future will be better. There's a lot that has to go right for shipping stocks to recover to a sustainable level, and until we have more certainty, this is an industry I would steer clear of. Bullish speculation can evaporate quickly, and there's now a long fall for these stocks if it does.

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Travis Hoium has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.