MW Dow transportation stocks are 'area of potential concern' for stock-market bulls
By Christine Idzelis
'According to Dow Theory, strong economies bring increased shipping of goods, benefiting transportation companies and their stocks,' says Yardeni Research
In a U.S. stock market that has risen to fresh records this week, the Dow Jones Transportation Index stands out for idling since 2021, according to Yardeni Research.
"Amid all the bullishness surrounding the achievement" of the Dow Jones Industrial Average recently reaching 40,000, transportation stocks are "one area of potential concern," said Yardeni, in a note Thursday. "It might be time for the stocks to play catch-up."
The Dow Jones Industrial Average, a blue-chip gauge for U.S. stocks, closed above 40,000 for the first time on May 17 to clinch a record closing high. The Dow DJIA was trading down sharply Thursday, at around 39,075, while the S&P 500 SPX and technology-heavy Nasdaq Composite COMP were also falling after each closed at all-time highs on May 21.
"According to Dow Theory, strong economies bring increased shipping of goods, benefiting transportation companies and their stocks," said Yardeni. "But that hasn't been the case this year."
Dow Theory, a popular and long-lived tenet of technical analysis, holds that if one stock-market average advances above a key level and is accompanied by another index rising above a key level, a larger uptrend is likely under way.
"While the Dow Jones Industrial Average has risen past successive milestones since 2021, the Dow Jones Transportation Average DJT has essentially moved sideways," said Yardeni.
Check out: Don't diss the Dow Theory just because it's over 100 years old (March 2018)
The S&P 500 shows a similar pattern, with its jump this year beating the decline in its transportation stock index, according to the firm's note.
"Some of the divergence between the S&P 500 and the S&P 500 Transports may be due to the increased importance of services and technology in the U.S. economy," said Yardeni. "Companies don't need a truck to provide cloud computing or streaming services."
The underperformance this year is probably linked to some companies' lack of need to restock shelves after the "buying boom" during the Covid-19 pandemic left them working down the excess inventory accumulated during that period, according to the note.
"For example, retail inventories excluding motor vehicles and parts have slowly edged lower after shooting up 41.4% from June 2020 to August 2022," said Yardeni. "But with inventories much leaner today and oil prices behaving, it may be time for transportation stocks to start working again."
Within trucking, the cost of moving freight has dropped over the past six months, while "the amount of stuff being hauled around the country has been flattish for the past few years," according to the note. J.B. Hunt Transport Services Inc. $(JBHT)$ saw its first quarter profit fall from a year earlier, the note shows.
Meanwhile, earnings growth in the S&P 500's rail transportation industry should accelerate in 2025 from this year's "sluggish pace," according to Yardeni. And in the airline industry, "consumers have returned to the skies in the years following Covid," the firm said, although Boeing Co.'s $(BA)$ "woes have severely limited the number of new planes it has delivered to airlines looking to retire older planes or to expand."
Read: Boeing's cash-flow woes hit company's bonds, raising fears of a debt downgrade
Stock-market investors have already priced in a lot of "bad news" is airfreight and logistics, with companies in that area having experienced "the toughest time of it this year," according to the note.
"Some of the pain is due to growing competition in the industry: FedEx and UPS have lost market share to Amazon, which ships its own products as well as the products sold by third-party retailers on its website," said Yardeni.
The U.S. stock market was trading down Thursday afternoon, with the Dow falling 1.5%, the S&P 500 falling 0.9% and the Nasdaq down 0.6%, according to FactSet data, at last check.
But all three major indexed are up so far in 2024 against backdrop of an economy that's been resilient despite the Federal Reserve's interest-rate hikes battling inflation. The Dow has risen around 3.7% in 2024, while the S&P 500 has climbed more than 10% and the Nasdaq has jumped more than 11%, according to FactSet data, at last check.
Still, shares of the iShares U.S. Transportation ETF IYT are down 1.8% Thursday afternoon, deepening their loss this year to more than 3%.
The fund's top five holdings as of May 22 included railroad company Union Pacific Corp. $(UNP)$, ride-hailing company Uber Technologies Inc. $(UBER)$ shipping giant United Parcel Service Inc. $(UPS)$, Delta Air Lines Inc. $(DAL)$ and FedEx Corp. $(FDX)$, according to data on BlackRock's website.
-Christine Idzelis
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(END) Dow Jones Newswires
May 23, 2024 15:48 ET (19:48 GMT)
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