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Wall St Week Ahead-Struggling Dow transport stocks could be economic warning signal
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Wall St Week Ahead-Struggling Dow transport stocks could be economic warning signal
Jun 2, 2024 6:28 AM

NEW YORK, May 31 (Reuters) - It's been a banner year for

the major U.S. stock indexes, but one economically sensitive

corner of the market sticks out as a sore spot.

The Dow Jones Transportation Average has fallen about

5% so far this year, a significant contrast with the 9%

year-to-date rise for the benchmark S&P 500 and the 1%

rise in the Dow Jones Industrial Average, which topped

40,000 points for the first time this month.

While major indexes including the S&P 500, the Nasdaq

Composite and the Dow have all set new all-time highs

this year, the Dow transports have yet to top their November

2021 record, and are some 12% below that level.

Some investors said the struggles for the 20-stock transport

index - which includes railroad operators, airlines, package

shipping companies and trucking firms - could signal weakness in

the economy or prevent the broader market from making

significant further gains unless they bounce back.

The Dow transports are "a barometer for future economic

activity," said Chuck Carlson, chief executive officer at

Horizon Investment Services. "They may be indicating that while

a recession isn't imminent, that there is probably a slowdown in

the economy that's ahead here."

The weakness in the transports is an example of how gains in

the tech-led S&P 500 - propelled by megacap stocks such as

semiconductor giant Nvidia ( NVDA ) - may be overshadowing

weaker performance in other corners of the economy following the

Federal Reserve's most aggressive monetary policy tightening in

decades.

Other areas that have struggled include small cap stocks,

which some analysts believe are more sensitive to economic

growth than large caps, as well as real estate shares and some

high-profile consumer stocks such as Nike ( NKE ), McDonald's

and Starbucks ( SBUX ).

Data this week showed the U.S. economy grew at a 1.3%

annualized rate in the first quarter, down from the 3.4%

fourth-quarter 2023 pace. A key test for the economy's strength

and for markets comes with the June 7 release of the monthly

U.S. jobs report.

Among the Dow transports, the biggest year-to-date laggards

are car rental company Avis Budget ( CAR ), off 37%, trucking

firm J.B. Hunt Transport, down 21%, and American

Airlines ( AAL ), off 17%.

Shares of major package shipping companies UPS and

FedEx ( FDX ), are down 13% and 1% respectively, while rails

Union Pacific ( UNP ) and Norfolk Southern ( NSC ) have both

slumped about 7%. Only four of the 20 components have

outperformed the S&P 500 so far this year.

Matthew Miskin, co-chief investment strategist at John

Hancock Investment Management, said it could be harder for the

broader market to break significantly higher unless the

transports pick up steam.

"There is something to be said about the guts of the market

not necessarily confirming all-time highs in the overall S&P

500," Miskin said. "So softness in some of the transports, I

think do warrant some caution."

Stocks have pulled back this week, with the S&P 500 down

more than 2% from a record high set earlier in May, with rising

bond yields causing concern about equity performance.

Not all investors believe the transport index is reflective

of the broader economy. The index is price-weighted, like the

Dow industrials - as opposed to weighted by market value like

many indexes - and includes only 20 stocks.

Meanwhile, another group also considered to be an economic

bellwether - semiconductors - has fared much better.

The Philadelphia SE semiconductor index has gained

20% this year, as investors flock to Nvidia ( NVDA ) and other chip

companies poised to capitalize on excitement over the business

potential of artificial intelligence.

The overall market trend remains bullish for Horizon's

Carlson, who tracks the Dow transports and Dow industrials

together to determine market trends, known as "Dow Theory."

But the fact that the transports closed at their lowest

point since November on Wednesday is worrisome, he said.

"It's not to say that the industrials and the broad market

can't continue to move higher," Carlson said. "But the

probability of doing it in a sustained way, I think, decreases

with the transports making new intermediate lows."

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