One of the biggest surprises recently has been the powerful breakout of the Dow Jones Transportation Average. It has been years since this index broke out of a trading range with such fervor. Within the index, components such as Union Pacific Corporation (NYSE/UNP), FedEx Corporation (NYSE/FDX), Alaska Air Group, Inc. (NYSE/ALK), J.B. Hunt Transport Services, Inc. (NASDAQ/JBHT) and Southwest Airlines Co. (NYSE/LUV) have all recently experienced strong price momentum on the stock market. It’s as if investor sentiment just changed on a dime.
And this is powerful; this is how stock market rallies begin—all of a sudden the world is different and institutional investors just start buying.
The Dow Jones Industrial Average is ready to test its all-time high set back in 2007 of just over 14,000. Many components of the Dow Jones Industrial Average are trading at or near their all-time highs. I actually think that this index is a little out of date in terms of its composition. But the Dow Jones Industrial Average is just that—an index to track industrial companies. The longest-running component listed on this index is General Electric Company (NYSE/GE), which is well off its all-time high. (See “Dividends Going Up Because Companies Don’t Want to Invest.”)
The stock market is bouncing around on daily earnings news, but generally speaking, it’s holding up very well. Mutual funds are reporting new inflows of cash, and there’s a lot a talk now about the great potential for an asset rotation into the stock market. This makes a lot of sense, as the bond market seems to have mostly played out.
I’m a believer in the Dow Jones Transportation Average being a leading index. According to the numbers, it has been a more powerful performer than the Dow Jones Industrial Average over the long term. The Dow Jones Transportation Average is highlighted below:
Chart courtesy of www.StockCharts.com
While the broader stock market seems fairly priced in my view, I find it difficult to expect a major new bull market without stronger earnings growth. Mind you, the stock market exists to bet on the future, so its recent strength is a vote of confidence. Even though the stock market recovered extremely well from 2009, it has been quite a while since investors bought stocks in anticipation of stronger earnings in future quarters.
Another important index recently broke out just as the Dow Jones Transportation Average did, and that’s the Russell 2000 Index, which measures small-cap stocks. In fact, the Russell 2000 just hit an all-time record-high, and that’s important because strength in small-caps is considered a leading indicator for the rest of the stock market.
So while there are always earnings disappointments, the stock market is looking pretty healthy these days. With the Dow Jones Industrial Average near its all-time high, you can argue that it’s not an ideal time to be buying. With an existing stock market portfolio, I’d wait for a major pullback before taking on any new material positions.
There are a lot of investors who are still sitting on the sidelines these days, investors who were fazed by the financial crisis of 2008/2009 and subsequent recession. This is why recent news of strong cash inflows into stock market funds is a very positive development. Investment risk remains high this year, and I still think investors need to be very conservative with their holdings. Global economic news is showing improvement, but expectations remain low. This is precisely the kind of environment for a stealth rally; but like last year, there’s great potential for a major pullback in the middle of the year.