Transportation and Our Economy
-
Posted in : Economics:
- On : Aug 28, 2006
by Bruce Fenton
Recent attention given to the financial troubles of the airlines underscores the importance of transportation systems to our economy. Indeed, the so-called “Dow Theory” used by technical analysts to predict major market movement, uses the Dow Jones Transportation Index as an integral element for such predictions.
Charles Dow, father of the Wall Street Journal and developer of the Dow Jones Averages, theorized in his early financial reporting late in the 1880s that there was a relationship between industrial stocks and the railroads. (Keep in mind that there were only railroads at that time. It wasn’t until 1969 that the Dow Transportation average was broadened to include truckers and airlines.)
Dow was of the opinion that market movements could be categorized as three types. A primary trend takes place over the course of years. This trend can be either up (Bull) or down (Bear). Secondary trends may run counter to primary trends and are usually of much shorter duration, lasting several weeks or months. Finally, of lesser importance are the day-to-day fluctuations, which can move in either direction.
He theorized that in order for a reliable trend to signal the market’s direction, the railroad index and the industrial index should be moving in the same direction.
The relationship between the two indices was logical to Dow. In order for the industrials to get their products to market, they must use the railroads. He noted that when the industrials did well, so did the transportation companies. But, when one sector was doing much better than the other, a divergence was forming. If the other sector did not catch up, a major market reversal was coming.
During Dow’s time, railroads had a monopoly on industrial transportation. The invention of the automobile gradually diminished the strength of this monopoly.
Even though the automobile was invented in the 1880s, it was not until the 1920s that it became a factor in industrial transportation. The reason was simple—there were no roads.
In 1919, the U.S. Army put together a cavalcade of military motor vehicles and set out to drive from Washington, D.C. to San Francisco. This epic continental journey took them across and through 3,250 miles of dirt, mud, rocks and sand. They averaged just less than 5 mph along the way.
The struggles of the journey left an indelible impression on a young Army officer, Dwight Eisenhower, who, four decades later when he became president, launched the building of the interstate highway system.
Author Pete Davies chronicles this adventure in his book American Road. He notes how important the development of a reliable transportation system was to the building of commerce across the lands.
Then, with very few exceptions, there were no paved roads. Few states were willing to fund the development and paving of roads. Much of the journey in the western states took place on wagon trails left over from the western migrations of 50 years earlier.
Today, our land arguably boasts the finest transportation system in the world. But Dow’s original theorizing retains remarkable relevance.
Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.
Looks like the DOW is up about 165 points so far today. I cannot ever remember such a crazy 10 days in the market. Down 500, up 300, down 400, up 300… It’s enough to give you an ulcer. 🙂