The Dow Jones Transportation Average is made up of twenty of the most prominent stocks in the transportation and delivery industries. The "Dow Transport" includes stocks such as Delta Air Lines (DAL), J.B. Hunt (JBHT), FedEx (FDX), and Norfolk Southern Railway (NSC).
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For over a century, the Dow Transport has often moved in tandem with the Dow Jones Industrials. That is a logical connection, since economic growth means more work for transportation companies. The connection holds generally well over the ages — Ned Davis Research reports that the two indices trade higher in tandem compared to their previous 200-day average over half of the time, and have since 1900.
On the occasions where the indices do diverge, it is considered an indicator of a downward adjustment in stocks. This premise, known as Dow Theory, has driven investment decisions for years. Why would stocks continue to rise without the fundamentals of transportation behind them?
Analysts are asking this question for 2015. As we near the halfway mark in early June, the Dow Transports have declined by 6.9% for the year and are on a sinking trend. Norfolk Southern is down 15.6% for the year, Con-way Trucking is off 14.6%, Delta is off 12.8% and United Parcel Service is off 9.6%. Even Southwest Airlines is feeling the pinch, down 12.2%.
Meanwhile, the Dow Industrials are up by a few tenths of a percent for the year as of this writing, with upward trends periodically stifled by concerns over a Federal Reserve rate hike and potential worldwide crises such as the Greek debt negotiations. The collective mixed signals of the economy, and the fact that the Dow has not seen a 10% correction in almost four years, are giving investors reason to pause.
Some financial advisors are sticking to the traditional view based on the assumption that a truly healthy economy cannot maintain growth with a lagging transportation sector. Others see conditions specific to transportation stocks that are relatively temporary in nature, but which have sent the stocks on an unusual roller coaster lately.
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Transport stocks gained 24% on average in 2014, and a small correction was due to bring valuations in line. According to FactSet as reported in The Wall Street Journal, the iShares Transportation ETF that tracks the Dow Transportation is trading at a multiple of 17.1 on the past twelve-month earnings. That compares to a multiple of 14.6 for the Dow Industrials.
Oil prices are blamed for much of the problem. Chief Investment Strategist of PNC Bill Stone calls the transport stocks "the mirror opposites of oil." As oil prices plummeted in late 2014 and early 2015, transportation companies reaped the benefits of vastly lower fuel costs. As oil begins to rebound from its low point of $43 per barrel, transportation companies are taking a relative hit.
Energy is hitting the railroad companies in a different way, through low natural gas prices. That requires less transporting of coal, a major component of railway business.
It is also possible that Dow Theory becomes less relevant as we have increasing intervention from the Federal Reserve, and as the U.S. economy shifts more from manufacturing to services that incur lower transportation costs.
Even with all of these caveats, an indicator with the track record of the Dow Theory cannot be simply ignored. It does seem anomalous that the economy can keep growing while the transportation sector continues to lag. Oil prices have stabilized at relatively low levels, so if transportation stocks do not turn around relatively soon, we may need to beware the blue chips.