- A drop in transportation stocks is sending a worrying signal about the broader stock market.
- Transportation stocks are considered a leading indicator because they point to the movement of goods across the country.
- Recent earnings reports from airline and trucking companies significantly missed analyst expectations.
A steady decline in transportation stocks is sending a worrying signal about the broader stock market and its chances of achieving an end-of-year rebound.
The Dow Jones Transportation Index fell below its early October support level this week and on Friday hit its lowest level since mid-June. The index is down 14% from its late July peak.
The fall is worrying because Transportation stocks are considered a leading indicator. for both the stock market and the economy, as these companies are tasked with transporting goods and people across the country, which is vital for continued economic growth. If companies experience a slowdown in growth and their stock prices fall, it could be a grim warning for the rest of the economy and the stock market.
The current slide in transportation stocks was exacerbated this week following disappointing earnings results from airlines and trucking companies.
JB hunt said its third-quarter revenue fell 17.6% amid lower freight rates, united airlines offered guidance for the fourth quarter that was weaker than expected due to rising fuel costs and disruptions to its flight routes to Israel, and american airlines said it was cutting its 2023 profit forecast.
Meanwhile, CSX Transportthe fourth-largest rail company by market value, said its volumes fell 2% in the third quarter.
The Dow Jones Transportation's drop below its early October low contrasts with the Dow Jones Industrial Average, which still remains above its early October low of around 33,000. Over the past three months, losses in transportation stocks have been more than double the losses seen in the broader market.
Y Charts
This represents a short-term divergence between two groups of stocks that typically move in tandem during bull market regimes. For the two indices to converge, as they often do, the transportation sector would have to experience a strong rebound or the broader market would have to fall a few more percentage points from current levels.
And if the latter happens, crucial support levels would be broken and investors' long-awaited year-end rally in the stock market would occur. partly explained by seasonal bullishness, I would be on thin ice.
But there is reason for optimism, as some of the problems seen in transportation companies' recent earnings results could be temporary.
"We are not yet at a point to say that we are out of the freight recession, but we do feel that we are coming out of it or, put another way, we are seeing signs that things are moving in a positive direction." JB said. Hunt President Shelley Simpson said Tuesday.
Meanwhile, American Airlines CEO Robert Isom told CNBC on Thursday that he expects strong vacation bookings this December.
"It's a difficult time, but that said, I see that demand, especially as we get closer to the holidays, is very strong. We have stronger bookings than the same time last year... overall, I feel very good about where the demand is. ...when I look out to 2024, I see solid demand," Isom said.
Finally, CSX CEO Joe Hinrichs said he is seeing steady economic progress despite this quarter's volume decline.
"Our freight business remains stable and our coal shipments were very strong. Our domestic intermodal volumes are growing well compared to last year, while our international intermodal business, although down year-over-year, has stabilized," he said Hinrich in his company's report. third quarter results call.
Despite recent weakness in transportation stocks, the Dow Theory buy signal that appeared earlier this year remains valid, suggesting that the main trend in the markets remains bullish and the recent decline is, for now, a typical correction.
"I remain optimistic if the Dow Industrials do not fall below their October 3 closing lows at 33,002.38," Manuel Blay, editor of TheDowTheory.com, told Insider on Friday. "I consider the bullish trend to be intact if the Dow Industrials remains above its October 3 closing lows."
The Dow Industrials fell about 200 points to 33,239 on Friday, just 0.72% higher than the index's Oct. 3 closing low.
