Sunday, August 12

Week 58 - Dow Jones Transportation Index: Taking the Pulse of the US Economy

Situation: Every economist has a favorite series of data points that s/he uses to measure whether the economy is heading up or down. Usually these “metrics” track activity that is related to the transportation sector. This was part of the reason Warren Buffett bought a railroad, i.e. to know how many freight cars were loaded yesterday compared to last week and last month. An economist I enjoy following will even phone toll booth operators working on the turnpike. News reports frequently mention the Dow Jones Industrial Average (DJIA) as being “up” or “down” but those reports don’t tell you that stock traders put little store in that movement unless it is further confirmed by a similar move in the Dow Jones Transportation Average (DJTA) and a corresponding increase or decrease in trading volume. Our key point here is that the movement of goods is the fulcrum of the US economy. Inventory drawdowns can herald a strengthening economy, or imply that manufacturers don’t see much of a market for their goods. However, when inventory drawdowns happen because trucks are pulling up to warehouses and distribution centers, then leaving with deliverables, it’s an early sign the economy is growing again and manufacturers will soon need to replenish inventories.

Let’s take a closer look at the stocks in the DJTA (Table). As always, we use blue highlight in the Table to denote companies that outperform the S&P 500 Index (e.g. fall less than 2/3rds as far in a bear market) and red to denote companies that underperform the S&P 500 Index. Only 18 of the 20 DJTA companies are tracked by S&P; those have S&P data that we summarize in the Table. The transportation sector is deeply cyclical because the only thing that transportation companies do is move goods from point A to point B, which is exactly why we’re interested. In a deep recession, only essential goods are being moved:  fuel for electrical powerplants, basic foodstuffs, medicine, laundry detergent, toothpaste. You get the picture. 

A sound long-term investment strategy is to have a solid idea of when the economy is seriously flirting with recession or is about to recover from recession. At those times, the DJTA may start to change direction even before the DJIA. If the DJTA heads down, that suggests the economy is slowing and becomes a tip-off to shore up our holdings of Lifeboat Stocks (Week 50) and bond funds. If the DJTA heads up during a recession, you’d better think about owning stock in more cyclical companies, or what we like to call Core Holdings (Week 22). There are even a few companies in the DJTA that have learned how to make at least a little money during the depths of a recession: CH Robinson Worldwide (CHRW), Norfolk & Southern (NSC), and Union Pacific (UNP). 

Bottom Line: We think the game to watch is the Dow Jones Transportation Average vis-a-vis the Dow Jones Industrial Average and the volume of trading. And think about buying stock in one of these transportation-related companies too, even though the ride is certain to be bumpy.

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