Charles Dow was, by all accounts, a respectable financial journalist.
Tycoons, businessmen, and lawmakers of the 19th century would invite him to their card games to smoke cigars and engage in lengthy discussions about the latest market developments.
As such, he had the privilege of seeing the big picture first, well before the rest of the market.
But Dow thought that was unfair… considering how speculative the late 1890s market had become.
He believed that investors needed a simple and up-to-date barometer for the stock values.
And so, in 1896, he created the Dow Jones Industrial Average (DJI)—a stock market index tracking the value of 30 large, publicly owned U.S. companies.
Later, he would go on to develop several other indexes, as well as Dow Theory, which states that there is a strong connection between stock market trends and other business activity.
Dow also believed that, if the industrial average and the transportation average both move in the same direction, then a major economic shift is taking place.
Moreover, he determined that when both indexes reach new highs, it signals the start of a new bull market.
The Best Way To Measure Global Economic Activity
Today, the DJI keeps climbing towards new highs and has even crossed the 27,000 milestone level.
But is this the start of a new bull market?
The Dow Jones Transportation Average (DJT) is still well below its all-time highs. And it would need to climb an additional 8% for Dow Theory to confirm a new bull trend.
Some financial analysts maintain that Dow’s theory died with him and that it’s not relevant in the modern world.
However, throughout my investing career, I’ve learned that it’s the simple-to-understand ideas that pass the test of time.
And I’d say this is the case with Dow Theory
The reason Dow Theory continues to hold today is because transportation stocks represent an accurate gauge for global economic activity.
Think about it. When world economies are doing well, the demand for products rises, leading to higher revenues for transportation companies. As a result, any stock rally without the support of transportation stocks is short-lived.
That was the case in 2018. When transportation stocks began to lag in the second part of the year, as a result of the ongoing U.S.-China trade war, a crash soon followed, proving the theory correct.
Dow Theory In Action
Today, it appears that the negative sentiment surrounding transportation stocks is finally reversing.
Several transportation companies have recently released upbeat second-quarter results, and I believe this is an early signal of a new bull market.
J.B. Hunt (JBHT), a Fortune 500 trucking and transportation company, surged by nearly 10% this week on robust second-quarter numbers. Canadian Pacific Railway (CP) also rose by almost 5%.
Overall, DJT has gained over 8% over the last month-and-a-half.
Clearly, the global supply chain has adapted to the continuing trade-war environment. And what we are witnessing now is an economic shift, just as Charles Dow predicted more than a century ago.
While the transportation index still has some way to go before it reaches a new high, I wouldn’t be surprised to see it hit 12,000 by the end of the year.