US slowdown or Amazon effect? Investors divided over index fall
The Dow Transports is seen as a barometer of the economy, but this time may be different
To the list of areas where Amazon is wreaking disruption, from retail to cloud computing, add another candidate: a stock market index that has been watched by investors as a barometer of the US economy.
The Dow Jones Transportation Average, the less well-known sibling of the Dow Jones Industrial Average, includes railroad operators, airlines and shipping companies whose fortunes are tied closely to economic activity.
The transport index has fallen more than 9 per cent since the start of December compared with between 3 and 4 per cent for other equity market benchmarks. That is exactly the kind of divergence that gives support to bears, who worry about trade wars and see slowing global growth.
“I do not think we are heading for a recession, but we are seeing a global economic slowdown and the Transports are reflecting that,” said Michael Underhill, chief investor officer at Capital Innovations.
But Mr Underhill and other market participants point out that idiosyncratic factors are pressuring some influential index members. That potentially reduces the signalling power of the Transports index.
Shares of FedEx, which has the biggest weighting in the index, have lost more than 17 per cent since the start of the month, in part due to concerns about Amazon Air, the ecommerce giant’s in-house freight delivery service. Amazon has been expanding its own shipping operations, both on the ground and in the air, to cut freight costs and speed up deliveries of its customers’ orders.
In early December, Morgan Stanley warned that investors “may be missing the risk” Amazon Air posed to growth at FedEx and rival UPS.
In a note to clients, Morgan Stanley said Amazon Air’s growth represents 2 per cent of potential revenue lost for UPS and FedEx in 2018 and at least 10 per cent by 2025, based on an analysis of Amazon Air’s overlap with the shipping companies.
Unlike the S&P 500, an index that reflects the market capitalisation of its members, the Dow Jones Transportation and Industrials indices are calculated on the basis of each member’s share price, which means a company with a high share price exerts a big influence even if its market cap is small.
FedEx accounts for about a quarter of the month-to-date loss in the Transports index, according to S&P Dow Jones Indices. Add in UPS, whose shares are down 12 per cent this month, and the two stocks threatened by Amazon Air account for about 3 percentage points of the index fall.
Those who think that the underperformance of the Transports could be the canary in the coal mine signalling an economic slowdown are not deterred, however.
“FedEx does skew the reading on the Transports index, but does not wash it out entirely,” said Nicholas Colas, co-founder of DataTrek.
It is particularly notable that the transport index is falling sharply even as oil prices have been going down, something that should be giving transport stocks a lift.
“Energy is typically a big part of their cost structure — they should be doing better than they are,” Mr Colas said. “The Transport index performance mirrors what other financial markets like the flattening of the Treasury yield curve are telling you: slower growth. It is just one more brick in the wall.”