Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Have We Been Watching the Wrong Dow Index?

Charles Dow created the Dow Jones Industrial Average (DJINDICES: ^DJI  ) in 1896, but this wasn't his first effort to track a basket of stocks representing a key sector of the American economy. In fact, it might not even be his most successful effort. He devised the very first Dow index 12 years earlier, in an era before "industrial" companies had become the globe-straddling titans we know today.

In Gilded Age America, railroads were king, and railroad stocks dominated the market. In 1884, Dow put together a basket of 11 stocks to best represent American market moves: the Dow Jones Transportation Average (DJINDICES: DJT  ) . By tracking nine railroads, a mail-carrying steamship line, and telegraph king Western Union (NYSE: WU  ) , the Transportation Average would effectively monitor the fortunes of "industry" when railroads and communications were American industry, or were at least as important to America's economic fortunes as Standard Oil and other commodity trusts would soon become.

The Industrial Average was born three years after the Panic of 1893 decimated American railroad stocks, but it continued to follow many of the same components that the early Transportation Average had tracked during its 12 years in existence. It wasn't until 1907 that the last "railroad" was removed from the Industrial Average, but the Dow Jones company continued to tinker with the Transports as well, although its focus remained understandably narrower. Unlike the Dow (we'll refer to the Industrial Average as the Dow and the Transportation Average as the Transports from here on out), the Transports has always followed 20 components, and it still follows Union Pacific (NYSE: UNP  ) , which has been a continuous Transports component since 1884.

But how has the Transports actually performed compared to the Dow? You might be surprised, but the Transports bests the Dow on virtually every timeline you can examine. It's positive this year, while the Dow is ever so slightly down:

^DJI Chart

^DJI data by YCharts.

It has doubled the Dow's gain over the past year:

^DJI Chart

^DJI data by YCharts.

Since the recession, the difference isn't as notable, as the Transports and the Dow were closely aligned until 2013 -- but even so, the Transports still came out on top from mid-2009 to the end of 2012:

^DJI Chart

^DJI data by YCharts.

It's not really any contest at all over the past decade, as the Transports has amassed nearly triple the gain the Dow has enjoyed since mid-2004:

^DJI Chart

^DJI data by YCharts.

It's only when we look back at the dot-com era that the Transports falls behind, as railroads, airlines, and shipping companies couldn't keep pace with the rest of the red-hot market. Even then, the two indexes only diverged toward the very end of the bubble:

^DJI Chart

^DJI data by YCharts.

Does this mean that the Transports will continue to top the Dow itself? That might not be the case. At the moment, the Transports tracks five airlines, four railroads, two consumer-focused delivery services (United Parcel Service (NYSE: UPS  ) and FedEx (NYSE: FDX  ) ), four trucking companies, one oceangoing shipping company, and four diversified shipping and logistics companies. In the past year, the long-moribund airline industry has taken off -- the five airline stocks on the Transports have all beaten (or come very close to beating) the Transports' overall performance:

ALK Chart

ALK data by YCharts.

The same holds true for the past five years -- of these five stocks, only JetBlue (NASDAQ: JBLU  )  underperforms the Transports since mid-2009:

ALK Chart

ALK data by YCharts.

That airline outperformance was not the case before the recession. The sector bloodbath that followed the terrorist attacks of Sept. 11, 2001, left every single one of these five stocks with a worse performance than the Transports from mid-2004 to mid-2009. Due to recent airline-industry consolidation, the Transports' five airline components can't be tracked all the way back to 2004, but in every case, they underperform the Transports itself from their earliest tracked period to mid-2009. If this underperformance returns, the Transports might no longer be the better of the two Dows.

Is the Dow Transportation Average a better way to follow the American economy? Is it a better way to invest? Over the past decade, the answer has undoubtedly been "yes," but there's no guarantee that strength in this sector will continue into the future.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2951241, ~/Articles/ArticleHandler.aspx, 9/4/2015 3:01:37 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Alex Planes

Alex Planes specializes in the deep analysis of tech, energy, and retail companies, with a particular focus on the ways new or proposed technologies can (and will) shape the future. He is also a dedicated student of financial and business history, often drawing on major events from the past to help readers better understand what's happening today and what might happen tomorrow.

Connect with Alex on LinkedIn or Twitter for more news and insight:

View Alex Planes's profile on LinkedIn

Today's Market

updated Moments ago Sponsored by:
DOW 16,056.95 -317.81 -1.94%
S&P 500 1,917.13 -34.00 -1.74%
NASD 4,667.52 -65.98 -1.39%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/4/2015 2:46 PM
^DJI $16057.01 Down -317.75 -1.94%
DJT $7771.72 Down -99.49 -1.26%
FDX $147.64 Down -3.58 -2.36%
FedEx CAPS Rating: ****
JBLU $23.54 Up +0.12 +0.51%
JetBlue Airways CAPS Rating: ***
UPS $94.86 Down -1.91 -1.97%
United Parcel Serv… CAPS Rating: ****