Wall St Week Ahead: Struggling Dow Transport Stocks Could Be Economic Warning Signal
It’s been a noteworthy year for the major U.S. stock indexes, yet an economically sensitive segment of the market has emerged as a conspicuous underperformer.
The Dow Jones Transportation Average, a trio of railroad operators, airlines, package shipping companies, and trucking firms, has dropped roughly 5% this year. This falloff marks a significant departure from the 9% advance the S&P 500 has enjoyed year-to-date and the 1% increase seen in the Dow Jones Industrial Average, which recently surpassed the 40,000-point milestone for the first time.
Despite the S&P 500, the Nasdaq Composite, and the Dow reaching new all-time highs this year, the Dow transports have not exceeded their November 2021 peak, sitting approximately 12% lower.
This lag in performance has led some investors to speculate that the 20-stock transport index might be signaling a forthcoming economic downturn or at least a slowdown that could hinder broader market gains unless a rebound materializes.
“They may be indicating that while a recession isn’t imminent, there is probably a slowdown in the economy that’s ahead here,” noted Chuck Carlson, CEO at Horizon Investment Services, highlighting the Dow transports as a future economic activity gauge.
The underperformance in transports showcases how advancements in tech-driven indices, like the S&P 500, may be masking weaknesses in other economy sectors, partly due to the Federal Reserve’s aggressive monetary policy tightening. Other areas showing strain include small-cap stocks, real estate shares, and notable consumer stocks such as Nike, McDonald’s, and Starbucks.
Recent data points to a U.S. economy growing at a 1.3% annualized rate in the first quarter, a slowdown from the 3.4% pace of Q4 2023. The financial community eyes the upcoming June 7 U.S. jobs report as a vital indicator of economic health.
Among Dow transports, Avis Budget, J.B. Hunt Transport, and American Airlines are the most significant laggards year-to-date, with stock prices dwindling by 37%, 21%, and 17%, respectively. The sector also sees declines in major shipping companies UPS and FedEx, and rails Union Pacific and Norfolk Southern, each showing noticeable dips. Only four out of the twenty indexed components have outperformed the S&P 500 this year.
Matthew Miskin, co-chief investment strategist at John Hancock Investment Management, comments on the implications of the transport sector’s performance, suggesting that a significant breakthrough in the broader market might be challenging without momentum in the transportation sector.
With the S&P 500 retracting over 2% from its May peak amid climbing bond yields, caution permeates the air, impacting equity appeal.
However, not everyone sees the transport index as a clear-cut reflection of broader economic health due to its limited scope and price-weighted measurement system. In contrast, the semiconductor sector, another economic bellwether, has surged by 20% this year, buoyed by investor enthusiasm in companies like Nvidia, riding the wave of Artificial Intelligence (AI).
Despite the concerning dip in transports, the market trend remains predominantly bullish according to Horizon’s Carlson, who employs the Dow Theory—assessing both the industrials and transports—to gauge market health. Yet, the recent slump to November levels triggers concern. “It’s not to say that the industrials and the broad market can’t continue to move higher,” Carlson reflects. “But the probability of doing so in a sustained manner decreases with the transports making new intermediate lows.”
