Logistics as a Barometer of Economic Health

Earlier this month in the Wall Street Journal, an article in the "Market Movers" section caught my eye. Written by E.S. Browning, it discusses the use of the Transportation Average as an accurate lead indicator in forecasting stock market health. Of course, when the finance industry directs their often short-attention span to transportation, it massages the supply chain manager's ego and we feel they are finally getting what we knew all along--that supply chain architectures support all that which drives economic health. Although transportation is one aspect of those architectures, it operates in parallel and collaboration with the many other physical, financial, informational, relational and innovational aspects of supply chains. So, for example, if manufacturing indexes are down but transportation indicators are up, we have to look at not just what these two are telling us, but also how entire supply chains are operating to make a true assessment of economic strength.

Into the WSJ article:

As they try to predict the future, some analysts are sneaking a peek at a 100-year-old investment theory. Based on the writings of Charles Dow, one of the founders of The Wall Street Journal, it is called Dow Theory.

It is catching people's attention because, until recently, the theory was flashing a yellow warning light about the stock market's future. Just lately, the light has turned green, or very close to it.

Dow Theory's most prominent tenet is that, for a stock-market rally to have legs, it needs not only the Dow Jones Industrial Average to hit highs but also the Dow Jones Transportation Average.

Dow Theory holds that the industrial average represents companies that produce goods, while the transports are the distributors -- railroads, airlines, truckers and package-delivery companies. If both are strong, it means a broad swath of the economy is supporting the market's gains. If not, it is time to check the market for lurking problems.

Despite volatility in gas prices over the past year: 

Among the transports' leaders at the moment are trucking and railroad companies, which are seeing strong demand.

Analysts are noticing.

"I am not a huge proponent of the Dow Theory, but I do very much care about the breadth of the market rally -- how many different sectors are participating," says Ken Tower, chief market strategist at CyberTrader, a Charles Schwab unit. Mr. Tower likes to use other, broader means of measuring how widespread the market's gains are. "And we are seeing the midcaps and the small caps and the transports join the Dow industrials at record highs. This is a good sign for the market's strength going forward."

In regards to that short attention span:

Back in the 1990s, many investors felt tech stocks were more important than transports. They noted services were a far bigger piece of the economy than manufacturing. And services are distributed not by truck but, often, by technologies. Today, however, the big economic driver is consumers, who use a lot of transportation for themselves and the goods they buy -- including tech goods.

Whatever the case, the broad number of stocks included in the market's recent gains is making even some skeptics say that they don't see the market running out of steam just yet.

I think one of things often missed today is just how much the services industry has become part of the supply chain industry--assisting firms in developing the more complicated architectures related to relationship-building and innovation initiatives that build upon and help reinvigorate what is already established in the physical, financial and informational (technology) practices of supply chain operations. As the above paragraph mentions, technologies and their complementary services (consulting, support, maintenance, etc) are not independent of--they are approached horizontally across--physical distribution and thus analysis shouldn't be independent--not approached functionally or vertically.

It seems that what is required in terms of assessing economic health is a paradigm shift in the mindset of analysts, so that thinking is more horizontal and able to accurately describe industry interdependencies and their impact.

Comments

[Eric Joiner]

Very well written article! I have been searching for opinions on this subject related to logistics.

Best regards,
Eric Joiner!

[Shawn in Tokyo]

Hi Eric,

Thanks for commenting. I am glad you liked the post.

Although I am not writing as much these days, I am hoping to be posting more in the future.

Please check back occasionally for new posts!

Regards,

Shawn