By turning in one of its worst daily losses in history, the Dow Jones Transportation Average
on April 1 cast an ominous cloud over both the U.S. economy and stock market.
The Dow transports tumbled almost 5% last Friday. That’s huge. To put this loss in historical context, it was worse than 99.6% of all daily returns for this index back to its creation in the late 1800s. It’s even rarer for this index to drop this much when the broad U.S. market is rising.
The major culprit in the Dow transports’ plunge were the price drops among the freight transportation companies that are part of the index. J.B. Hunt Transportation Services Inc.
fell close to 10%, for example; Norfolk Southern Corp.
dropped almost 7%.
These price declines are a bad omen because the freight transportation sector has been found to be a reliable leading economic indicator. Consider a study conducted several years ago by the Bureau of Transportation Statistics within the U.S. Department of Transportation. The authors report that the Bureau’s “Freight Transportation Services Index” (FSI) leads slowdowns in the economy by an average of four months.
To be sure, the FSI is not identical to the Dow transports. The FSI is only reported monthly, and with a significant time lag. The latest available reading, for example, is for January of this year. But because the FSI and the Dow transports have been significantly correlated in the past, it’s a good bet that the Dow transports are just as good a leading indicator as the FSI. (See the historical correlation between the two in the chart below.)
Threats to globalization
Many are arguing that the big drop in freight company stocks is a reflection of the new world order that could emerge from Russia’s invasion of Ukraine. This new order will be hostile to increased globalization and because of that, there in turn will be less international commerce. Doug Kass, the president of Seabreeze Partners Management, has gone so far as to declare that “globalization, the practice and ideology, is dead.”
One consequence, according to Manuel Blay, editor of TheDowTheory.com, is that the stock market is punishing U.S. firms that rely on international supply chains. He points out that U.S. companies that are “more local [and] less outsourced” recently have significantly outperformed.
For the record, I note that Blay doesn’t base his market timing advice on the Dow Jones Transportation Average alone. Consistent with his interpretation of the Dow Theory, the oldest market timing system that remains in widespread use today, he instead focuses on both the Dow Transports and the Dow Jones Industrial Average
On that basis, Blay issued a “sell” signal on Feb. 22 of this year. (Neither Kass nor Blay are among the advisers whose performances are tracked by my auditing firm.)
The bottom line? It’s not a good sign that the Dow Jones Transportation Average had such a bad day last Friday. It’s especially ominous that the freight transportation companies within the Dow transports were the major culprit in that decline.
It’s always possible that the prices of these freight companies’ stock could soon recover. But early indications aren’t encouraging. In trading on April 4, after traders had a weekend to reconsider Friday’s carnage, the Dow transports lagged the overall market, falling 0.1% in contrast to the Dow Industrials’ gain of 0.3%.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at [email protected]
More: Dow transports selloff may be warning of something more than just a macro speed bump
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