The "Dow Theory" ascribed to Charles Dow, founder of the Wall St. Journal, in the late 1800s, is a somewhat vague model of the American economy but goes something like this.
There are three parts to the economy: industry, transportation and utilities.
Industry pays utilities for energy to build products and then pays transports to ship products to consumers who then pay industries as products are consumed. Demand for each part depends upon the other. Which comes first? The chicken or the egg? is a universal question.
Dow created three indexes to represent each sector: the Dow Jones Industrial Average, the Dow Jones Utility Average and the Dow Jones Transportation average (originally called "Rails"). Remember, this was before cars and trucking.
The monkey in the wrench here is "Inventory"! Meaning if sales fall, inventory will rise, then shipping will fall and then, finally, once factories reduce production, utilities will fall. A healthy economy will have stable to falling inventories (if factories produce what people want), rising transportation, booming factories and booming utilities-all reflected in the Dow Jones Averages. The basic idea is that it takes time for increased inventories at the sales counter to be reflected in reduced shipment, reduced production and lower utility sales.
Let's look at these averages since 2000.
Compound Annual Growth Rate
How interesting! In 2000 utilities were still booming as the industrials fell and transport was roughly unchanged. Were factories overproducing? Were production costs too high? In 2001, utilities and transports corrected while factories continued falling. 2002 may have been a capitulation. Production collapsed, as did the utility average and transports took its hit too!
2003 was a big recovery year for all indexes. It looks like transports and utilities were the end of the economy's bullwhip.
Industrial growth continued at a lower pace for the next few years. Note that transports were the canary in the gold mine with 0% return in 2007.
2008 walloped the markets with their largest collapse since the Great Depression. Oddly enough, there were no wars and no pandemics, just a true economic recessions that took all ships down.
2009 was the start of an impressive decade of recovery and boom. The fact that transports fell in 2011 while industry grew may be a sign of the strong inventory control during this period. The hiccup in 2018 may also be a sign of this strong control. Transports took the hit while industrials and utilities barely budged.
Today, the markets may FEEL a lot worse than they were, they appear to be struggling at inventory control. Transports are down over 20% as factories and even utilities struggle.
TRAN = Dow Jones Transportation Average
UTIL = Dow Jones Utility Average
As bad as it feels, the economy as seen through these lenses is not very different than the recent past. The headlines may be blaring about "worst ever" but the numbers clearly don't show it. In 2000, it took three years for the markets to recover from the dot com crash and 911. Today-with pandemic and war-only time will tell.
While Dow Jones Averages have many critics as price indexes and have been supplanted by S&P indexes and many others, they still ARE the most widely watched measures of the stock market and as such, merit our attention here.
Disclaimer: Posts are for education only, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors. Send request to gdrahal@outlook.com to follow this blog and for additional information.
© 2022 George Rahal
No comments:
Post a Comment
Please feel free to comment!