What The Dow Transports Are Saying

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What The Dow Transports Are Saying

We love an old school data point, and in the world of US equity markets they don’t get any dustier than the Dow Jones Transportation Average. Charles Dow created it for his “Customer’s Afternoon Letter” in 1884, 2 years before he started the now-better known Industrials Average. The original DJTA had nine railroads, one steamship company, and telegraph operator Western Union. Even Mr. Dow wasn’t averse to sneaking a “Tech company” into his stock index…

Today, the Dow Transports look like this:

  • 20 companies in total
  • 6 airlines: Alaska Air, American, Delta, JetBlue, Southwest, and United
  • 4 railroads: CSX, Kansas City Southern, Norfolk Southern, and Union Pacific
  • 4 delivery/transportation services: Expeditors Intl, FedEx, Ryder and UPS
  • 3 trucking companies: CH Robinson, JB Hunt, and Landstar
  • 3 others: Kirby (barges), Matson (ocean shipping) and Avis Budget (car rental)

The Transports remain a closely watched indicator because these companies have high fixed costs/significant operating leverage to economic trends. So how are they doing?

  • The DJTA is up 13.6% YTD, lagging the S&P 500’s 19.4% advance.
  • The Transports peaked over a year ago, on September 10th 2018, and are currently 8.8% below that high.
  • On the plus side (sort of), much of the Transport’s underperformance this year comes from one name: FedEx, which is down 9.7% on the year.
  • If FedEx were performing either inline with UPS (+22.1% YTD) or as well as the other large weightings in the DJTA (NSC +20.0% YTD, UNP +20.1%, KSU +37.9%), then the Transports would be up 16.5% – 16.8% in 2019.

The bottom line here is that FedEx explains half of the Transport’s underperformance in 2019. The rest is a mishmash of individual stock underperformance, such as CH Robinson (4.9% weight, -0.2% YTD), United (5.2% weight, +5.4% YTD) and CSX (4.0% weight, +10.8% YTD). Only American Airlines is as big a train wreck as FedEx, down 14.4% YTD, but it is only 1.6% of the DJTA.

Now, as far as what the Transports are telling us about the state of the US economy, consider a 5-year chart for the Average:

That looks about right to us: lots of volatility since the start of 2018, and right in the middle of the range since then. Not falling apart, in other words. Just “meh”.

Our conclusion is that the Transports simply reflect current trade/economic uncertainty rather than signaling something more ominous like a looming US recession. The group has rallied along with the rest of US stocks in 2019, just not as much. One company – FedEx – is responsible for half the shortfall to the S&P. Yes, it would be a positive if Transports could find some support and rally from here. But if and when they do, they will likely be a concurrent rather than leading indicator of better investor sentiment.