Many times the activity begin in the Rail Average before the Industrial Average. Before the economic activity began, raw materials will have to be moved from the suppliers to manufacturers. Before the automotive companies could increase production, more steel need to be transported. An increase in activity among the rail stocks would foreshadow an increase in business activity for the industrial stocks. You can also foreshadow an economic downturn.
(Chart: Dow Jones Transportation Average)
The internet has changed the economy and is more different from hundred years ago, and the makeup of the DJTA has changed to favor the airlines. There is still credibility in using DJTA to confirm movements in the DJIA. Transport stocks are much more dependent on the economic environment than the average stock and will likely foreshadow economic growth.
Energy and labor cost from a large portion of expenses, The airline business is cyclical and revenues are highly susceptible to economic changes. Airline companies typically carry above average levels of debt and will be more vulnerable to changes in interest rates.
To reflect the added risks above airline stocks have traditionally sold significantly below market multiples. If the PE for the S&P 500 is 28, the average airline might sell for only 8-10 times earnings.
Airline companies bear the burden of all interest rates, energy costs and labor costs, but are still likely to act as a leading indicator of the general economic environment. Airlines biggest fear should however be that people will stop flying in airplanes.
That`s why I`m following airplane and shipping stocks all the time. It gives me a sign of a new activity in the economy or a real slowdown in the economy. As you can see on the chart above, the activity is great, which is good for the transportation stocks.
09:45 a.m EST Chicago PMI
10:00 a.m EST Pending Home Sales m/m
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