Shares of planes, trains and automobiles are skidding, and that often spells trouble for the rest of the market. But some analysts and investors aren't heeding the century-old warning sign this time around.
The Dow Jones Transportation Average is on track for its first quarterly decline in more than a year, as the index has fallen 2.9% so far this quarter. The Dow Jones Industrial Average is up 5% the final three-month period of the year.
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The index of 20 of the largest U.S. airlines, railroads and trucking firms is used by some in the market as a proxy to gauge the health of the U.S. economy since those companies are responsible for the vital movement of raw materials, goods and people.
So when the index diverges from the broader Dow Jones Industrial Average, some investors take it as a sign to sell. However, several analysts and investors say the Dow transports' weak performance is due to a spate of downbeat earnings rather than a deeper economic funk.
Analysts specifically pointed to a series of hurricanes in the previous quarter that disrupted thousands of flights among airliners, including United Continental Holdings Inc., American Airlines Group Inc. and Southwest Airlines Co., and caused service disruptions for railroad operators and shipping companies at a time when most transportation businesses are grappling with rising costs.
"There's pretty good divergence there. But the latest pullback in transports was more due to disappointing third-quarter earnings," said Leo Grohowski, chief investment officer of BNY Mellon Wealth Management, adding that airlines were particularly weak.
Still, the quarterly decline in transport stocks is noteworthy given how closely the two indexes tend to trade. Since 1900, the Dow industrials and the Dow transports have traded above their 200-day trading average in tandem more than 50% of the time, according to data from Ned Davis Research.
Airlines in the Dow transports were among the hardest-hit stocks. Shares of United have fallen 12% since it reported earnings last month. United said storms like Hurricane Harvey disrupted its operations and caused it to incur higher costs, while the rollout of new low-cost, no-frills fares, known as "Basic Economy," all contributed to a drop in revenue, executives said while discussing third-quarter results.
Both American Airlines and Southwest Airlines reported improved revenue in the previous quarter, while maintaining prices that helped offset rising fuel, labor and other costs. Still, the hurricanes shaved off millions of dollars in profit and revenue at both carriers. American shares have fallen 4.6% since it reported earnings on Oct. 26, while Southwest has declined 3.6%.
Railroad companies haven't fared much better in recent months, despite the double-digit gains they had already notched. Norfolk Southern Corp. posted upbeat results last month, beating revenue and profit estimates, yet its stock has fallen 2.6% since it reported earnings on Oct. 25. CSX Corp. beat profit expectations but saw revenue fall short due, in part, to service delays that stemmed from the hurricanes and derailments. Its shares have fallen 3.5% since it released earnings Oct. 17.
Another big laggard in the index: Avis Budget Group Inc. The car-rental company's shares tumbled 16% since it said on Nov. 6 that higher fleet costs and weaker international pricing had hurt the car-rental company, causing it to miss earnings and revenue expectation and lower its sales guidance for the remainder of the year.
As the transports index lurches toward its first three-month decline since the second quarter of last year, stock market volatility has picked up slightly relative to much of the rest of the year. That has created a better environment for stock pickers, some investors added.
"Stock disparity is picking up and that's an opportunity for active managers," said Jason Pride, director of investment strategy at wealth-management firm Glenmede. "Stocks are showing signs of moving away from one another."
Concerns around how Republicans proceed on their tax overhaul contributed to recent declines in the Dow Jones Industrial Average, causing the index to snap an eight-week winning streak and swing between gains and losses in recent sessions. Sectors that had been performing better earlier this year, such as industrials, are now lagging, while concerns about the market's health picked up following losses in the junk-bond market.
Lofty valuations, especially among technology companies that have contributed significantly to the market's gains this year, have also kept investors on edge, with some believing those stocks could pull back on geopolitical concerns or due to developments in Washington, D.C.
"The albatross for the market is valuations at this point," said Terri Spath, chief investment officer of Sierra Investment Management, an investment firm with $2.7 billion in assets. "They've been too high for a while."
Write to Michael Wursthorn at Michael.Wursthorn@wsj.com
(END) Dow Jones Newswires
November 22, 2017 17:19 ET (22:19 GMT)