The Dow Transports have historically been considered a good leading indicator of the global economy given that the companies in the group are responsible for moving goods across the country. While we wouldn’t completely dismiss the Dow Transports as an economic barometer, as the economy has migrated away from manufacturing over the years, the sector’s relevance has declined. In an interview earlier this week, we argued that because semiconductors are central to every aspect of the globally connected economy and even to many analog aspects of the economy, they could be considered the 21st century equivalent of the Dow Transports. Every investor is entitled to their opinion of whether the Transports still carry the same weight as they have in the past as an economic or market barometer, or if the Semiconductor group has the same sort of relevance. One thing everyone can agree on, however, is that right now the sectors are telling two very different stories.
The chart below compares the relative strength of the S&P 500 Semiconductor Group and the Dow Transports to the S&P 500. For each chart, a rising line indicates outperformance versus the S&P 500, while a falling line indicates that the S&P 500 is outperforming. From last March right up through the later stages of 2018, both sectors saw their relative performance versus the S&P 500 decline. Beginning in November, though, semis began to turn things around while the Transports have continued to lag, and in recent weeks their performances couldn’t be more opposite. Just today, the semis are trading at their best levels since early October while the Transports are still trending lower. Only time will tell which sector is giving a more accurate picture of the economic backdrop, but semis have had more recent history on their side.