Why Transportation Stocks Are So Important

In my last post I reported (and linked) to an article about transportation stocks and what the "warnings" mean which have been issued recently.  The graph below from the Wall Street Journal and this article really define why it is so important and why we need to follow these stocks not just because we are logisticians but because we follow the economy in general.

Graph from Wall Street Jounal

The Divergence of the Dow Transports and the Dow

As if on queue from my posting yesterday, Mark Hulbert  (read all his stories here) writes on marketwatch.com about the divergence between the Dow Industrial index and the Dow Transports.  He shows a graph which is very interesting and may help answer the questions I raised yesterday when I asked how the economy (as measured by the stock market) could be so high yet freight growth appears to be crawling along. His graph (reproduced below) shows for some time now the Dow Transports have lagged the overall Dow.  I suspect if you put in the S&P500 you will see this as well.

Dow Transports (in Red) Versus Dow 

So, what does this tell us?  Mark believes it may signify the leading indicator of an overall slowdown in the economy (which of course does not bode well for the transportation industry).  However an interesting point which I had not followed before is his point around the divergence or the relative performance of the Dow Transports to the Dow overall.

He claims (as apparently it is in Dow Theory) that it is precisely this divergence which indicates the slowdown not specifically the fact that that transports are slowing down.

Perhaps it is best to think about it this way, like a good race horse, the Dow is executing one last gasp then it will stop where as the other race horse (i.e., the transports) already crossed the finish line and is stopped.  I don't know if that is a good analogy or not however I will set a favorite to always compare the Dow transports to the Dow overall now and let's see how his analysis plays out.

The Business of Investing

Ok, I know this is a logistics blog but I also have a passion for business in general so I thought I would write very quickly about investing.  Warning:  I am a Jack Bogle, index investor who believes there is absolutely no way to beat the market in the long run.  I am reading "Don't Count on It!" by Jack Bogle and he summarizes the simplicity of investing in this way:

A return on a stock / equity investment is simply the addition of:

1) The economics (i.e., growth rate plus dividend yield) and...

2) Speculation / Emotion - This is essentially the change in the P/E ratio over or under the long term averages.

For P/E, he basically says if P/E is under 10 then it is clearly likely to increase and if P/E is around 20 it will likely decrease (of course as all good indexers remind you, you just never know when!).

Applying this very simply, here is what I think of what your or my expectation of stock market returns should be right now:

1) Growth of the entire market is about 2 - 4% (i.e., the GDP0
2) Dividend yield is (Using the vanguard total market ETF as proxy): 1.76%

This means you can plan on "enterprise" returns of 3.76% to 5.76%.  However, the P/E is 8.04 which means you are likely to pick up an additional 2% or so in "emotional or speculative" returns as the P/E reverts to the mean.  So, you should plan on about 5-10% returns on stocks with the middle ground being most likely.  That is a normal expectation.