Once hot transportation stocks and exchange traded funds, such as the iShares Transportation Average ETF (NYSEArca: IYT) and the SPDR S&P Transportation ETF (NYSEArca: XTN), could be ready to pullback over the near-term in the eyes of some market observers and technical analysts.
IYT, which follows the Dow Jones Transportation Average, surged last year. Transportation stocks were expected to benefit from lower oil prices and while that has been the case for airline stocks, other industry groups represented in IYT, including railroads, have struggled.
“So go transport stocks, so goes the economy, according to classic Dow theory, given the breadth of goods shipped across rails and airplanes. Indeed, the UPS results could indicate some sort of economic “slowdown,” according to BK Asset Management’s managing director of foreign exchange strategy Boris Schlossberg,” reports CNBC.
The Dow Theory stipulates that if an upward trend in one of its industrial or transportation averages increases above a previous high, it is accompanied by a similar advance in the other index.
Politics are play a part in the recent struggles encountered by the transportation sector. For example, airline stocks have pinched following President Donald Trump’s efforts to enforce an immigration ban on select Middle East countries, a move that ignited protests at airports across the U.S. The U.S. Global Jets ETF (NYSEArca: JETS), the only dedicated airline industry-related ETF on the market, is off 2.3% over the past week.
JETS follows the U.S. Global Jets Index, which uses fundamental screens to select airline companies, with an emphasis on domestic carriers, along with global aircraft manufacturers and airport companies.
“In addition to reporting earnings that missed expectations, the company also reduced guidance. In a press release, UPS’s chief financial officer said earnings ‘were challenged by a shift in product mix and the continued softness in industrial production,’” according to CNBC.
UPS is a major holding in IYT. Transports are also sensitive to the dollar and interest rates, indicating the group may have gotten some relief Wednesday when the Fed declined to hike interest rates.
However, if the dollar falls as markets price in the Federal Reserve not being able to raise interest rates later this year, industrials could benefit because some members of the sector generate substantial portions of their revenue overseas. Transportation stocks are part of the broader industrial sector.