Transport Stocks Are Flashing Bullish Signals for Broader Market

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The Dow Jones Transportation Average, which tracks 20 companies ranging from UPS to Union Pacific, has jumped ahead of other market gauges

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This month the Dow Jones Transportation Average, which tracks 20 large US companies ranging from delivery giant United Parcel Service Inc,

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to railroad operator Union Pacific Corp.

, has jumped ahead of other market gauges. The transportation average has advanced 7.3% in March, compared with a 2.9% gain for the Dow Jones Industrial Average and a 3.9% rise for the S&P 500.

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The rally is a promising signal for investors worried how the US economy will fare as the Federal Reserve begins raising interest rates to combat high inflation.

“It suggests that perhaps the US economy is more resilient or on firmer footing than some people would give it credit for,” said Michael Arone, chief investment strategist at State Street Global Advisors.

Fed Chairman Jerome Powell has said the central bank is prepared to raise interest rates high enough to slow the economy if it determines that is needed to bring down inflation. Some analysts have pointed to the converging of yields on shorter-term and longer-term US government bonds as a concerning sign that the bond market is close to predicting a recession.

Transportation stocks’ recent leg higher has helped the group nearly recoup its year-to-date losses: The benchmark is down just 0.6% in 2022, versus a loss of 4.1% for the Dow industrials and a decline of 4.7% for the S&P 500 .The tech-heavy Nasdaq Composite has suffered even more in the face of expected interest-rate increases and is down 9.4% in 2022.

Among the stocks driving the rebound are maritime shipper Matson Inc.,

, up 35% in the year to date; rental-car company Avis Budget Group Inc,

, up 27%; barge operator Kirby Corp,

, up 24%; and Union Pacific, up 8.5%.

The Dow transports are off 3.8% from their November record, closer than the major US stock indexes to their highs.

Freight activity has risen lately to reverse some of the decline recorded during the surge of the Omicron variant of Covid-19. In seasonally adjusted terms, US shipping volumes in February recovered almost half of the decline the prior month, according to the Cass Freight Index.

There are also signs of pricing power. FedEx Corp,

recently reported stronger-than-expected quarterly sales after higher shipping rates made up for shipping fewer packages overall. The delivery company’s shares are up 1.9% in March but down 12% in the year to date.

Airline executives have said demand for travel is bouncing back, and that they believe customers are willing to pay more to cover higher fuel costs. Shares of carriers are mixed this year, with Alaska Air Group Inc,

up 10% and American Airlines Group Inc,

down 5.3%.

“When the airlines tell you that they’ve got gangbuster demand, that tells you they’re seeing a very strong consumer with disposable dollars for travel,” said Michael Farr, chief executive and founder of investment management firm Farr, Miller & Washington. “That gives you an indication the consumer is going to be spending in other areas of the economy as well.”

One wrinkle for investors looking to the Dow transports for insights about the broader market: The popularity of Avis with online traders has inclined its shares toward outsize moves that sometimes seem disconnected from the economic outlook.

That volatile stock-market performance has made Avis the biggest contributor this month to the gains of the price-weighted transportation average, according to Dow Jones Market Data. Avis shares jumped 22% on March 16 after the company added $1 billion to its share repurchase authorization.

But shares of the rental-car company are still down 26% from the Dow Jones Transportation Average’s Nov. 2 record, and Avis has subtracted more points from the index since that time than any other member.

The biggest contributors of points since the November high are Matson, Union Pacific, Kirby and freight bellwether JB Hunt Transport Services Inc.,

—companies moving goods and commodities through the economy.

Write to Karen Langley at [email protected]


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