Understanding the Impact of Lagging Dow Transports on Stocks and the Economy
The Dow Jones Transportation Average (DJT) has been struggling to keep up with the other major U.S. stock-market averages, which have been soaring to new all-time highs. As of March 4, the DJT was more than 6% below its all-time high from November 2021, a staggering 28 months ago. Over the past year, the Dow Transports has lagged behind the broader Dow Jones Industrial Average (DJIA) by more than 12 percentage points. This has raised concerns among investors who see the transportation sector as a leading indicator of U.S. economic activity.
However, an analysis of the U.S. stock market’s performance since 1928 reveals some interesting findings that contradict this commonly held belief. In fact, there is evidence to suggest that the broad market actually performs better following periods of relative weakness in the Dow Transports. The author analyzed the difference in trailing 12-month returns between the Dow Industrials and the Dow Transports for each trading day since 1928. They also calculated the returns of the S&P 500 (SPX) and its predecessor index over the subsequent one, three, six, and 12 months. The results showed that, on average, the S&P 500 performed better after periods in which the Dow Transports significantly lagged behind the Dow Industrials.
These findings challenge the notion that relative weakness in the Dow Transports should be a cause for concern. However, what happens when the Dow Transports experience absolute weakness, regardless of its relative performance to the DJIA? Again, the analysis revealed no cause for concern. The S&P 500 actually performed better, on average, following 12-month periods in which the Dow Transports fell rather than gained. The difference in 12-month gains was 9.0% versus 6.6%.
The bottom line is that there are plenty of legitimate causes for concern in the current market environment, such as overvaluation and extreme exuberance. However, the weakness in the Dow Transports should not be one of them. Investors may be better off focusing on other factors and indicators when making investment decisions.
Mark Hulbert, a regular contributor to MarketWatch, conducted this analysis. His Hulbert Ratings tracks investment newsletters and provides audited ratings. He can be reached at mark@hulbertratings.com.
In conclusion, while the lagging performance of the Dow Transports has raised concerns among investors, historical analysis suggests that this weakness should not be a major cause for concern. The broader market has historically performed better following periods of relative and absolute weakness in the Dow Transports. Instead of fixating on this particular indicator, investors may be better served by considering other factors that could impact the stock market and the economy as a whole.