This week, companies that transport goods and act as a weather vane for the US economy sent a signal.
The Dow Jones Transportation Average (Transportation Average) has fallen to its lowest level since November and is expected to close for the third consecutive week. Furthermore, these losses pushed the index below the 200-day moving average, a long-term trend indicator that traders are closely watching. It was also the worst month since October last year.
Despite the encouraging results released by United Airlines Holdings Inc. (UAL), the company's optimistic outlook indicates that consumption remains strong, but the stock price has declined. This has put the spotlight on trucking and logistics companies, two of which - JB Hunt Transport Services Inc. (JB Hunt Transport Services Inc.) and Knight-Swift Transportation Holdings Inc. (Knight-Swift Transportation Holdings Inc.) - Warned that the freight industry is in a challenging situation, including weak prices, which is eroding profit margins.
As a result, the two stock market indicators, which together provide clues about the state of the economy, now provide early clues, and this situation usually means that there will be more fluctuations in the future. A century-old market wisdom — the Dow theory — requires that any change in the Dow Jones Industrial Average needs to be confirmed by similar changes in the transportation index, and vice versa for this direction to truly remain the same.
Julian Emanuel (Julian Emanuel), chief stock and quantitative strategist at Evercore ISI, said: “What we are concerned about is that, as a rule, weak Dow transportation is a sign of broader economic weakness in the future.” Although there are no signs of this yet, the company does predict that a mild recession will begin in the fourth quarter.
“Can Dow transport (Dow transport) be a leading edge in this development?” Of course,” the strategist added.
The drop in the transportation index is part of Evercore ISI's argument that the current pullback of the Standard & Poor's 500 (S&P 500) won't end before testing its 200-day moving average, which is currently around 4,600 points. Emmanuel added: “If economic weakness becomes apparent, especially if inflation remains sticky, this correction is likely to be deeper and last longer.”
Tension over the wider market intensified this week as rising geopolitical tension and a double blow from the increasingly hawkish Federal Reserve (Federal Reserve) dampened market sentiment. Signs of a continuing decline in the freight market have further exacerbated these concerns.
JB Hunt issued the first warning in its quarterly results, saying weak demand had caused the entire group's share price to fall. Subsequently, Knight-Swift also lowered its performance expectations for the first and second quarters, further spreading pessimism. The Russell 3000 Trucking Index (3000 Trucking Index) is expected to record the worst weekly decline since June 2022. The biggest declines were JB Hunter and Forward Air Corp. , Saia Inc. , ArcBest Corp. , XPO Inc. , Marten Transport Ltd. , Heartland Express Inc., and Landstar System Inc.
Loop Capital Markets analyst Rick Paterson said, “The demand situation we are seeing now indicates that the bottom may still be ahead.” Paterson downgraded Knight-Swift this week.
However, some say it may be too early to start worrying about the broader signals released by the fall in transportation stocks this week.
Robert Anderson (Robert Anderson), an American industry strategist at Ned Davis Research, said. The conventional wisdom of the past was that when both Dow Industries and Dow Transportation were on an upward trend, the stock market would strengthen. This has been the case for a long time, but not recently,” so from an overall market perspective, I wouldn't be too worried.”
Furthermore, railway operator CSX Corp.'s performance was slightly higher than expected, despite the difficult freight market, which suggests that some corners of the industry may continue to be resilient.