Published: March 5, 2024 at 5:45 pm ET
While the other major US stock market averages hit new all-time highs, the Dow Jones Transportation Average DJT struggled.
The index as of March 4 was more than 6% below the all-time high it reached in November 2021 – 28 months ago. Last year, the Dow Transports underperformed the broader Dow Jones Industrial Average DJIA by more than 12 percentage points. The reason this worries many investors is the belief that the transportation sector is a leading indicator of U.S. economic activity.
Still…
While the other major US stock market averages hit new all-time highs, the Dow Jones Transportation Average DJT struggled.
The index as of March 4 was more than 6% below the all-time high it reached in November 2021 – 28 months ago. Last year, the Dow Transports underperformed the broader Dow Jones Industrial Average DJIA by more than 12 percentage points. This worries many investors because they assume the transportation sector is a leading indicator of U.S. economic activity.
However, I couldn't find any data to support this. On the contrary, there is actually evidence that the broader market is performing better in the wake of the Dow transport's relative weakness.
Consider what I found when analyzing the performance of the U.S. stock market since 1928. For each trading day since then, I have calculated the difference between the trailing 12-month returns of the Dow Industrials and Dow Transports. I also calculated the returns for each day of the S&P 500 SPX and its predecessor index (the S&P 500 was introduced in 1957) over the following one, three, six, and twelve months. I found that the S&P 500, on average, performed better after periods in which the Dow Transports significantly underperformed the Dow Industrials – as is the case now.
These differences are shown in the table below:
Absolute versus relative weakness
These results show that the relative weakness of the Dow transport is not a major concern. But what happens if the Dow Transports loses ground, not relative to the DJIA, but in absolute terms? This question is also relevant to the question of whether the Dow Transports is a good leading indicator for the economy.
But here too I saw no reason to worry. The S&P 500 performed better on average after 12-month periods in which the Dow Transports fell rather than rose. The difference in 12-month gains is 9.0% versus 6.6%.
The final result? There are many legitimate reasons for concern these days, from overvaluation to extreme exuberance. There is no reason to add to these worries by worrying about the weakness of Dow transportation.
Mark Hulbert is a regular contributor to MarketWatch. Its Hulbert Ratings tracks investment newsletters that charge a flat fee to review. He can be reached at [email protected]
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