By The Dow Jones Transportation Average (DJT) has been showing remarkable strength in recent weeks, leading the overall market higher. However, it remains uncertain whether this surge in the transportation sector indicates a continuing bull market for the United States.
Notably, the Dow Transports have now exceeded their previous closing high from early February 2023. Their previous inability to do so caused concern among stock-market professionals, but what was once worry has now transformed into exuberance. Just two months ago, the Dow Transports significantly trailed the Dow Jones Industrial Average (DJIA) in terms of trailing 12-month performance, lagging by 6.9 percentage points. Yet, they have now not only caught up but surpassed the Dow by over 9 percentage points in trailing-year performance. This impressive turnaround amounts to a 16 percentage point swing in just two months.
However, it is important for the bulls to temper their excitement regarding this extraordinary swing in favor of the Dow Transports. The same reason that cautioned against interpreting the Transports’ underperformance as bearish holds true today. One should keep in mind my previous report stating that “neither Dow Average is a consistently good leading indicator.” The lack of consistency between these averages contributes to their unreliable predictive power. In certain decades, one of the averages may exhibit a positive correlation with the subsequent return of the S&P 500, while in other decades, they may both show an inverse correlation.
Consequently, it is crucial not to jump to automatic conclusions based solely on any divergence between the two Dow averages.
Leading economic indicator vs. leading market indicator
It is crucial to differentiate between a reliable leading indicator of the economy and a reliable leading indicator of the stock market. As previously reported, the transportation sector serves as a decent leading indicator for the former. Research conducted by statisticians at the U.S. Department of Transportation reveals that shifts in their Freight Transportation Services Index occur months ahead of changes in overall economic growth, whether it’s an acceleration or deceleration.
On the other hand, the stock market also serves as a reliable leading economic indicator, often anticipating changes in the overall economy by several months. Therefore, it would be unreasonable to expect the transportation sector to function as a leading indicator of the stock market as well. To fulfill that role, it would have to act as a leading indicator of a leading indicator.
Refer to the accompanying chart, which displays the Dow Transports and the Freight Transportation Services Index. As expected from two leading economic indicators, they exhibit a strong correlation.
In conclusion, the robust performance of the transportation sector brings positive economic news. However, it does not necessarily guarantee the continuation of a bull market.
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