Have We Been Watching the Wrong Dow Index?

The Dow Transports has outperformed the Industrial Average for years, but we hardly ever talk about it.

May 9, 2014 at 12:46PM

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.

Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more insight into markets, history, and technology.

The Motley Fool recommends FedEx, United Parcel Service, and Western Union. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers