Why transport stocks need to get back on the rails

Regular readers of this column will be well aware that it is a bit of a trainspotter – and, for that matter, a ship-, truck- and plane-spotter, too. This is because it is a great adherent of Richard Russell’s Dow Theory, which argues that if the Dow Jones Transportation index is thriving, then the better-known Dow Jones Industrials index should flourish too.

The logic here is that it can only be good news if the share prices of the firms moving goods around the world by road, rail, sea or air are doing well. If something is sold, it has to be shipped.

By default, the opposite holds true, or so the theory goes. Weak transport stocks could mean inventories are piling up on shelves and forecourts, to herald production cuts and a potential downturn in industrial activity, economic output, corporate earnings and potentially stock market valuations.

It is therefore interesting to see that the Dow Jones Transportation index still lurks 6% below its September 2018 peak, even as the Dow Jones Industrials index cracks the 28,000 barrier for the first time ever.

“It is therefore interesting to see that the Dow Jones Transportation index still lurks 6% below its September 2018 peak, even as the Dow Jones Industrials index cracks the 28,000 barrier for the first time ever.”


The Dow Jones Transportation index is rising a lot more slowly than the Dow Jones Industrials

Source: Refinitiv data

It would not do to over-dramatise this, as the Transports index is still up by 19% in the year to date. But Dow Theory says the index needs to lead the Industrials and when it lags, attention should be paid. So pay attention we must.

Collapse in Cass index

The Dow Jones Transportation index’s inability – thus far – to set new highs does unfortunately tally with quite a few economic data points from the US.

One is the Cass Freight Index, which measures monthly freight activity in North America. October’s reading showed a 5.9% year-on-year drop in activity. That was the eleventh decline in a row and prompted Cass to note the following.

  • “The shipments index has gone from ‘warning of a potential slowdown’ to ‘signalling an economic contraction’.”

  • “Demand is weaker across almost all modes of transportation, both domestically and internationally.”

  • “Several key modes, and key segments of modes, are suffering material increases in the rates of decline, signalling the contraction is getting worse.”

  • US freight volumes are softening …

    Source: Cass, FRED - St. Louis Federal Reserve database

    … and this is starting to take a toll on truck orders

    Source: FRED - St. Louis Federal Reserve database

    “The persistence of the freight trend is a worry and it is starting to filter through to other parts of the US economy – just look at how the cost of hauling by freight is sagging and how, in turn, that is weighing on orders for new trucks.”


    There are lots of cross-currents here, including firms building up inventory and then liquidating it again as deadlines for new US tariffs on Chinese goods come and go, and the 40-day strike by 49,000 workers at General Motors production facilities. But the persistence of the freight trend is a worry and it is starting to filter through to other parts of the US economy – just look at how the cost of hauling by freight is sagging and how, in turn, that is weighing on orders for new trucks.

    If that latter trend is not already showing up in durable goods orders, industrial production (and jobs) data, then surely it will soon, unless there is a rapid improvement. No wonder the Atlanta Fed’s GDP Now and the New York Fed’s Nowcast surveys are busily cutting their forecasts for American economic growth to just 0.3% and 0.7% respectively – down from Q3’s 1.9% annualised rate.

    Shipping forecast

    But these freight- and transport-related issues are not unique to the US, even if the White House’s ongoing trade dispute and negotiations with Beijing could be one major influence.

    Global trade volumes seem fragile, too, according to monthly World Trade Monitor published by the CPB Netherlands Bureau for Economic Policy Analysis.

    World trade volumes seem fragile too

    Source: www.cpb.nl – World Trade Monitor

    Stock markets may not seem unduly fussed, buoyed as they are right now by interest-rate cuts from central banks and hopes for a US-China trade deal. But corporations are taking note. Just ask Copenhagen-quoted AP Møller Maersk, the world’s largest container shipping company (a status which may make it a decent proxy for global growth).

    “Corporations are taking note. Just ask Copenhagen-quoted AP Møller Maersk, the world’s largest container shipping company (a status which may make it a decent proxy for global growth).”


    Chief executive officer Soren Skou has just cut his outlook for growth in global container demand to 1–2% from 1–3% for 2019. The better news is that the forecast of 1–3% growth for 2020 looks more optimistic, but the company’s share price seems unconvinced.

    AP Møller Maersk’s soggy share price could be a warning sign

    Source: Refinitiv data

    Its longstanding relationship with the FTSE All-World index broke down in 2017 and has yet to recover. It could therefore be argued there is a growing disconnect between cheap-money fuelled markets and the underlying macroeconomic and corporate profit picture.

    AJ Bell Investment Director

    Russ Mould’s long experience of the capital markets began in 1991 when he became a Fund Manager at a leading provider of life insurance, pensions and asset management services. In 1993 he joined a prestigious investment bank, working as an Equity Analyst covering the technology sector for 12 years. Russ eventually joined Shares magazine in November 2005 as Technology Correspondent and became Editor of the magazine in July 2008. Following the acquisition of Shares' parent company, MSM Media, by AJ Bell Group, he was appointed as AJ Bell’s Investment Director in summer 2013.

    Top