Lewis Krauskopf
NEW YORK (Reuters) – It was a strong year for major U.S. stock indexes, but one economically sensitive sector of the market remains a sore spot.
The average index is down about 5% this year, a marked contrast to the index’s 9% gain since the start of the year and the 1% rise in the index, which topped 40,000 for the first time this month.
While major indexes including the S&P 500, the Dow Jones Industrial Average and the S&P have set new all-time highs this year, the Dow has yet to top the November 2021 record and is about 12% below that level.
Some investors said the battle for the 20-stock transportation index, which includes rail operators, airlines, freight companies and trucking companies, could signal weakness in the economy or prevent the broader market from making significant further gains unless they recover.
The Dow transportation indexes are “a barometer of future economic activity,” said Chuck Carlson, chief executive officer of Horizon Investment Services. “They may indicate that while a recession is not imminent, a slower economy is likely ahead.”
Weakness in the transportation sector is an example of how gains in the S&P 500 tech index, supported by mega-cap stocks like semiconductor giant Nvidia (NASDAQ:), could dwarf weaker performances elsewhere in the economy following the Federal Reserve’s most aggressive moves. tightening monetary policy for decades.
Other areas that are struggling include small-cap stocks, which some analysts say are more sensitive to economic growth than large-cap stocks, as well as real estate stocks and some large consumer stocks such as Nike (NYSE:), McDonald’s (NYSE:) and Starbucks (NASDAQ:).
Data this week showed the U.S. economy grew at an annual rate of 1.3% in the first quarter, compared with a pace of 3.4% in the fourth quarter of 2023. A key test of the strength of the economy and markets will be the release of the monthly US jobs report on June 7.
Among Dow transportation companies, car rental companies have been the biggest laggards year-to-date. Avis Budget (NASDAQ:) with a 37% discount, trucking company JB Hunt Transport with a 21% discount and American Airlines (NASDAQ:) with a 17% discount.
Shares of major freight carriers UPS and FedEx (NYSE:) fell 13% and 1%, respectively. Union Pacific (New York Stock Exchange:) and Norfolk Southern (NYSE:) fell about 7%. Only four of the 20 components have outperformed the S&P 500 this year.
Matthew Miskin, co-chief investment strategist at John Hancock Investment Management, said the broader market could have a harder time rallying significantly higher if transportation doesn’t pick up steam.
“There’s something to be said about the guts of the market that don’t necessarily support the S&P 500’s all-time highs,” Miskin said. “So the softness of some vehicles, I think, warrants some caution.”
Stocks have fallen this week, with the S&P 500 down more than 2% from a record high set earlier in May, and rising bond yields have raised concerns about stock performance.
Not all investors believe that the transport index reflects the situation in the economy as a whole. The index is price-weighted, like the Dow Industrial, rather than market value, like many indexes, and includes only 20 stocks.
Meanwhile, another group of companies also considered economic leaders – semiconductor manufacturers – are doing much better.
The Philadelphia SE semiconductor index is up 20% this year as investors flock to Nvidia and other chip companies poised to capitalize on the excitement about the business potential of artificial intelligence. The overall market trend remains bullish for Horizon’s Carlson, who tracks the Dow transportation and industrials indexes together to identify market trends known as “Dow Theory.” But the fact that shipping closed Wednesday at its lowest level since November is a concern, he said. “That doesn’t mean industrials and the broader market can’t continue to grow,” Carlson said. “But the likelihood of this happening on a permanent basis, I think, is decreasing as transport reaches new intermediate lows.”