(The Associated Press circulated the following on April 23.)
NEW YORK — This is the week to see if the transports can keep on trucking.
The Dow Jones Transportation Average reached a new high Friday, putting it up 14 percent year to date, just as the Dow Jones Industrial Average, up 4 percent this year, also hit a peak.
According to Dow Theory, a century-old investing strategy based on the market musings of Charles Dow, a founder of The Wall Street Journal, when the industrials and transports hit highs, that’s a bullish sign for stocks and the economy. Strength in one index is believed to confirm strength in the other.
Late last year, the transportation average, which tracks railroads, truckers and airlines, was stumbling as the industrials rose, raising concerns about an economic slowdown. The signal worked. Growth slowed early this year, thanks in part to the housing market and subprime-mortgages woes.
The latest transport rally suggests the economy may turn the corner soon. But is that really going to be the case?
The jump has been fueled largely by an upward run in railroad stocks, which have a 29 percent weighting in the average, the largest of any group.
This month, Warren Buffett’s Berkshire Hathaway said it had taken a large position in shares of Texas railroad Burlington Northern Santa Fe, a Dow transport component. That helped push the sector higher. A London hedge fund has disclosed it’s built a large position in CSX stock, further fueling speculation that big-money investors might step in and buy other cash-flow-rich railroads.
The buyout hype might be skewing the transports. The fundamentals of the sector certainly don’t look all that great.
Total rail traffic has been softening for months, in large part because home builders and auto makers are moving less product. Railroad freight volume was down 4.5 percent through mid-April this year from the same period last year, the steepest decline in 11 years for that period, according to Lacy Hunt, chief economist of Hoisington Investment Management, an Austin, Texas, money manager.
Last week, CSX reported a 4 percent decline in first-quarter freight volume from a year earlier. Union Pacific, which posted a 2 percent drop in freight volume, cut its full-year revenue and volume forecast.
Burlington Northern and Norfolk Southern, the other railroads in the transportation average, report results this week, making this an important week for transports. If CSX and Union Pacific are any hint, perhaps investors shouldn’t expect much.
Other transportation groups aren’t hitting on all cylinders. Airline stocks have languished this year, in part due to rising oil prices. Trucking volumes are also languishing.
Truck tonnage was down 1.7 percent from a year earlier in February, the eighth straight year-over-year decline, according to the American Trucking Associations. And surveys of truckers point to pessimism about the state of business.
A central notion behind Dow Theory, that stocks are a dependable indicator for the economy, doesn’t always hold. In 2002, the Dow transports dropped more than 30 percent as an economic expansion took hold.
Paul Kasriel, Northern Trust’s bearish chief economist, doesn’t trust the market now. “People who invest see a turnaround, but I don’t,” he said. “I see it worsening.”