Trucks waiting to enter the Port of Los Angeles. (Eric Thayer/Bloomberg News)
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This week, transportation companies, the bellwethers of the American economy, were in trouble.
The Dow Jones Transportation Average has fallen to levels last seen in November and is on track to end the month with a decline for the third consecutive week. The losses also pushed the index well below its 200-day moving average, a long-term trend indicator that traders watch. It is also the worst pace since October.
This decline comes despite United Airlines Holdings’ upbeat outlook suggesting that consumer demand remains strong. As a result, the focus is on trucking and logistics companies, two of which, J.B. Hunt Transport Services and Knight Swift Transportation Holdings, are facing challenges in the freight industry, including low prices that hurt margins. Warning of a dire situation.
As a result, two stock market indicators that provide clues about the state of the economy are now showing early signs of caution, a situation that usually means more volatility is in store. The Dow Theory, 100 years of market wisdom, states that for its direction to truly hold, movements in the Dow Jones Industrial Average must be confirmed by similar movements in the transportation index, and vice versa. That is what is required.
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“Our concern is that weakness in the Dow Transports is often a sign of broader economic weakness down the road,” said Julien Emanuel, chief equity and quantitative strategist at Evercore ISI. The company expects a mild economic downturn to begin in the fourth quarter, although there are currently no signs of that happening.
“Can Dow Transport be at the forefront of such a development? Yes,” the strategist added.
The decline in the transportation index is part of Evercore ISI’s theory that the S&P 500’s current correction will not end until it tests its own 200-day moving average, which currently sits around 4,600. “If economic weakness becomes apparent, the adjustment could become deeper and longer, especially if inflation remains high,” Emanuel added.
This week, the double whammy of rising geopolitical tensions and deteriorating sentiment from a hawkish Federal Reserve heightened concerns about the broader market. These concerns are compounded by persistent signs of recession in the freight market.
JB Hunt issued its first warning when it announced its quarterly results, saying weak demand had caused the group’s overall share price to fall. Subsequently, Knight Swift also lowered its earnings forecasts for the first and second quarters, further deepening the gloom. JB Hunt and Knight-Swift rank No. 3 and No. 7, respectively, on the Transport Topics Top 100 list of North America’s largest rental carriers.
The Russell 3000 Truck Index is on track for its worst weekly decline since June 2022, with JB Hunt, Forward Air, Saia, Arkvest, XPO, Marten Transport and Heartland Express leading the way.Landstar System Co., Ltd.
“We’re currently looking at demand conditions that suggest the bottom may still be a long way off,” said Loup Capital Markets analyst Rick Patterson, who downgraded his recommendation for Knight Swift this week. .
Still, some say it may be too early to start worrying about the broader signals from this week’s slide in transportation stocks.
“Conventional wisdom has been that stocks are stronger when both the Dow Jones Industrial Average and the Dow Transportation 30 are trending up. This has been the case over the very long term, but recently That’s not the case,” said Robert Anderson, U.S. sector strategist at Ned Davis Research. “So from an overall market perspective, there’s not much to worry about.”
And railroad operator CSX Corp.’s results were slightly better than expected despite a tough freight market, suggesting parts of the industry may remain resilient.
“The freight economy was depressed due to the pandemic, but it’s now starting to normalize,” said Lee Kraskow of Bloomberg Intelligence. “The non-service economy accounts for about 30% of GDP, so GDP could grow even with a freight downturn.”
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