Stocks just logged a strong first month for 2024. Under the surface, Wall Street isn't so cheery.
The Dow Jones Transportation Average, which tracks 20 US transportation stocks from railroads to airlines to delivery, has fallen 1.6% so far this year, underperforming the broader Dow industrials' 2.2% gain.
That's a reversal from the transportation index's nearly 6% gain in December, as optimism that the economy would see a soft landing, or a marked decline in inflation without spurring a recession, sparked a gangbusters "everything" rally across markets.
As that optimism dims, some investors worry that the decline in transportation stocks suggests rough times ahead for the economy. The transportation index tends to fall when the economy deteriorates, as demand for travel and goods wanes.
CH Robinson Worldwide shares have slid about 15% so far this year, United Parcel Service shares have lost 9%, Avis Budget Group shares have fallen 8% and Alaska Air Group shares have declined 7%.
The divergence between the two indexes raises a red flag on Wall Street. Some investors believe that when the transport index falls as the broader blue-chip index rises, it's a sign that demand for goods is declining even as supply stays robust.
"It seems investors are sort of playing a little bit with belts and suspenders on the soft landing bet," said Mark Luschini, chief investment strategist at Janney Montgomery Scott.
That waning optimism took another hit this week, when the Federal Reserve on Wednesday held interest rates steady at a 23-year high and signaled that it is unlikely to begin paring back rates in March. The Dow transports are on track for their worst weekly decline since early January.
Turmoil in the airline industry also likely contributed to the recent slide in transportation stocks. Airline stocks tumbled in January when a door plug on an Alaska Airlines Boeing 737 Max 9 blew off mid-flight, sparking fears that Boeing's other aircraft could also be faulty.
The Russell 2000 index, which tracks the stocks of smaller US companies, has slid 2.6% for the year in another potential sign that investors are worried about the economy. Like the Dow transports, small-cap stocks tend to rise and fall with economic cycles.
Losses in economically sensitive stocks also portend another concern for investors: the stock market's narrow rally. Many hoped that the sweeping year-end returns would continue to broaden this year, since wide-ranging gains support a healthier, more sustainable rally. But the tech stocks that ruled last year's market have continued their dominance.
The Magnificent Seven (Nvidia, Amazon, Apple, Microsoft, Meta Platforms, Tesla and Alphabet) drove 45% of the benchmark S&P 500 index's 1.6% gain in January, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
Excluding Tesla shares, which fell about 25% last month, the group would have accounted for 71% of the benchmark index's gains.
"Were we really seeing the outcome of the soft landing bid effusively into the stock market, one would expect to see that broadening," said Luschini.
Still, economic data released this month suggests that the labor market remains strong, consumers are still spending and inflation is trending closer to the Fed's 2% goal.
"If we do have anything more putative than a soft landing, we're well positioned to go through it," said Dr. Jason Heller, senior executive vice president at Coastal Wealth. "I'm not willing to give up the idea that a soft-ish landing could happen."
Comments
Post a Comment