By Karen Langley
Transportation stocks haven't hit a new high in 16 months, a potentially ominous sign for investors betting on a pickup in global growth.
The Dow Jones Transportation Average -- which tracks the performance of 20 large U.S. airlines, truckers, railroads and shippers -- is still 4.4% below its record from Sept. 14, 2018. Over the same period, the Dow Jones Industrial Average has risen 11%, notching 31 closing highs along the way, according to Dow Jones Market Data.
The transport stocks have also underperformed the blue-chip index over the past three months, rising 3.6% versus the Dow industrials' 8.1% gain. That disconnect raises concern for proponents of the Dow Theory who say weakness in shares of companies that transport raw goods and materials can point to turmoil for the broader market.
Disappointing results from companies including trucker J.B. Hunt Transport Services Inc. and logistics firm Expeditors International of Washington Inc., along with signs of weakness in freight activity, have weighed on the transports lately.
"The fact that the transports have lagged is a signpost of sluggishness in the overall economy," said David Rosenberg, chief economist and strategist at Rosenberg Research, who noted that small-cap stocks also have failed to make new highs. The Russell 2000 index of small companies is 4.5% below its record close from Aug. 31, 2018.
The recent market rally has been largely fueled by investor demand for shares of fast-growing companies, such as technology firms, while the members of the transport group tend to be slower-growing and more subject to economic fluctuations.
"The transports lagging is part of the general lagging of value-oriented stocks," said Ed Keon, chief investment strategist at multi-asset manager QMA.
To be sure, the stocks have underperformed at other points in the bull-market run and the broader index has continued to hit new highs.
Although the economy as a whole appears to be humming along, manufacturing has been in a rut. The U.S. factory sector contracted in December for a fifth consecutive month, with a reading from the Institute for Supply Management at its lowest level since June 2009.
In one sign of the tough environment for transport, the Cass Freight Index, a measure of North American freight activity, showed shipment volumes dropped 7.9% in December from a year earlier, while freight expenditures dropped 6.2%. Both measurements were at their lowest level of 2019.
"They're like hand in glove," said Nela Richardson, investment strategist at financial services company Edward Jones, referring to the relationship between transportation and global manufacturing. "We're seeing transportation doing pretty well, given low volumes, but a catalyst for growth in the transportation sector would be a rebound in manufacturing."
Manufacturing accounts for only 11% of U.S. gross domestic product, and the broader picture shows signs of strength. Unemployment is at a 50-year low, and consumer spending has been solid.
The long-simmering trade war between the U.S. and China has weighed on global manufacturing activity. But the outlook has brightened as the two countries reached an agreement in recent weeks. The International Monetary Fund predicted this week that global gross domestic product will expand by 3.3% in 2020, up from 2.9% in 2019.
"If we're right that the trade deal as well as some of the firming of economic data leads to an improvement in overall volumes, then that should be a benefit for this group," Chris Shipley, head of fundamental equities at Northern Trust Asset Management, said of the transport stocks.
Although investors have reacted positively to the ratcheting-down of trade tensions between the U.S. and China, some note that the agreement leaves in place U.S. tariffs on about $370 billion in Chinese goods.
"This idea that growth is going to jump on this trade deal may not be realized," said Peter Boockvar, chief investment officer at Bleakley Advisory Group.
Earnings season has gotten off to a rough start for some companies in the sector.
Shares of J.B. Hunt dropped 4.2% on Jan. 17 after the trucking company reported lower-than-expected profits for the fourth quarter. Expeditors International shares fell 5.6% the same day, after the company said that its quarterly revenue and earnings will fall short of Wall Street expectations. The company partly blamed trade disputes and the slowing of global economies.
And freight rail operator CSX Corp. projected another challenging year in 2020 when it reported declines in quarterly revenue and profit. It also posted a record efficiency level and saw its shares drop only 0.4% on Jan. 17, the next trading day.
"It took industrial activity a while to cool off, and it will take a while to heat back up," CSX CEO Jim Foote said on a call with analysts on Jan. 16.
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Write to Karen Langley at firstname.lastname@example.org