Chips may be hot, but transports are experienced

CHIPS MAY BE HOT, BUT TRANSPORTS ARE EXPERIENCED

Recent focus on mega-tech and in particular Nvidia NVDA vs transports stocks begs the question of whether the century-old bellwether status of Dow Jones Transportation Average DJT is still relevant "in the age of semiconductors," according to Quincy Krosby at LPL Financial.

The firm's chief global strategist notes that at the start of the current bull market "semiconductors led the charge along with consumer discretionary, technology and home builders" while transports didn't participate until some days later.

This led to talk that semiconductors had replaced transports as "the bellwether for global demand" according to Krosby.

Because chips are "embedded in nearly every component of the modern economy" the argument is that they "better reflect demand for the broader global economy."

But the DJT still represents "a key measure of demand for consumer and manufacturing purchases," she notes, as it includes airlines, trucking and logistics, and the railroads, which move people, goods, and materials.

While the Philadelphia semiconductor index SOX is up 22.8% so far this year, the DJT is down ~4%.

So Krosby asks if transports are "seeing a more marked slowdown in the economic landscape" or is their weakness "more specific to the weakness in the trucking industry where sluggish pricing is eroding operating margins."

She does point out that rail stocks are doing better and airlines say that retail and business travel "remains robust."

While Krosby concedes that there's always an evolution of which sectors are more important she argues that "the semiconductors and transports should both be afforded bellwether status in terms of future economic activity."

"With GDP cooling even at the margin, the transports with 100 years of experience, may be predicting a deeper chill," the strategist cautioned.

On Wednesday, the DJT is up 0.5% while the Sox is up 1%. While Nvidia is down 0.6% as investors await restlessly for its earnings report after the close, shares in many other chip companies are soaring with Analog Devices ADI leading the charge with a 9% gain.

(Sinéad Carew)

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