Summary…..This week has been filled with a lot talk about concerns about U.S. and global economic growth….as well as concerns about the Transportation stocks (which are obviously quiet economically sensitive). Since the Federal Reserve is not cutting rates or engaged in QE right now (despite all their dovish jawboning), we believe “growth” is going to be an even more important factor than it usually is for the stock market going forward. With this in mind, we want to focus on one key sub-group within the Transports…the railroad stocks…because the S&P 500 Rails Index is at a key technical juncture.
One of the key themes we’ve been harping on in recent weeks is the thought that we’re going to need to see a reversal in the recent slowing of economic and earnings growth in the U.S. (and around the globe)…if the stock market is going to rally further. After a 20% rally in just 2.5 months, we’re going to need more than just a dovish “pivot” by the Fed to keep the market rallying from its recent over-bought condition. Even though the Fed has definitely jawboned the markets in a much more dovish fashion, they have only stopped raising rates (they have not started cutting them)…and history tells us that the stock market tends to continue to decline even AFTER they stop raising rates. This is particularly worrisome this time around…because they’re still engaged in QT and not in QE! In other words, despite all the hoopla, the Fed is still tightening, not easing!!!
The weakness in the Transports has only been going on for two weeks, so we’re going to have to see more downside follow-through before we can say that the trend in the Transports has turned down. Therefore, we don’t want to make too much of this weakness just yet, but if the stock market’s action over the next six months is going to be dependent on the economy (like we think it will)…one key sub-group of the transports (the railroads) should indeed be a KEY indicator over the coming days and weeks.
The airlines and the truckers have not been acting well at all for a while now. Not only has the XAL airline index has fallen more than 7% recently, but it now stands 21% below its 2018 highs. Similarly, the DJ US Trucking index has also fallen 7% in the past week and is down almost 16% below its own 2018 highs.….While this has been taking place, the S&P Railroads Index has fallen less than 3%…and it stands less than 2% below its 2018 highs.
We do admit that some of this divergence (the out-performance in the railroads) is probably due to the issue of “Precision Railroading” which will help the rails with their operational improvement. Thus some of the out-performance might have to do with this issue…rather than “economic growth” issues.
However, you don’t have to be an economist to know that the railroad industry is still a very economically sensitive one, so its action over the coming days and weeks should be VERY, VERY important. If they can hold-up…and work-off their short-term over-bought condition with a mild decline…and then bounce back and take-out those all-time highs, it’s going to be very bullish for the group (and a very bullish indication for the economy). However, the rails roll-over in a more meaningful way…and start to play catch-up (or should we say “catch-down”) with the airlines and the truckers…it’s going to be a negative signal for growth.
We need to highlight this negative possibility because the railroad stocks were a good leading indictor at the beginning of the stock market correction in early 2018…and the one that started in late 2015 (and bottomed in early 2016).
Needless to say, the railroad stocks and the broader Transportation sector are not the only items we should be watching for clues as to how the economy is going to perform going forward. Keeping an eye on the economic data (like this week’s employment report)…and well as other economically sensitive indicators (like “Dr. Copper”)…is also going to be very important. However, the action in the railroad stocks could/should be something investors watch very closely over the coming days and weeks.