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(Bloomberg) — A century-old indicator that has helped predict the direction of the US stock market is signaling more pain ahead for battered investors.
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Known as the Dow Theory, it holds that moves in the Dow Jones Industrial Average (^DJI) must be confirmed by transport stocks, and vice versa, to be sustained. As of Thursday’s close, the 20-member Dow Jones Transportation Average — a barometer of consumer and industrial demand — has slumped 19% from its November peak, teetering near so-called bear-market territory.
Taken together with the 9.3% slump in the Dow Jones Industrial Average from its December record, the indicator is flashing a worrisome sign for the broader stock market, which has been hammered in recent days by deepening concerns over the economy and the Trump administration’s aggressive stance on tariffs.
“As a risk barometer check, that’s not a great backdrop for the overall market,” said Todd Sohn, managing director of ETF and technical strategy, at Strategas Securities.
The weakness in the two Dow indexes highlights how bearish signals are starting to come in fast from different corners of the market, he added, noting steep declines in homebuilders, chipmakers and industrials.
For some time now, investors have been concerned about the toll that an uncertain macroeconomic environment can take on businesses and consumers. Those worries came to the forefront over the past week as several airlines and retailers released cautious outlooks, citing weak demand.
This week, Delta Air Lines Inc. (DAL) cut its profit outlook in half and American Airlines Group Inc. (AAL) said its first-quarter loss would be roughly double its prior guidance. Sales forecasts from retailers like Dick’s Sporting Goods Inc. (DKS) and Kohl’s Corp. (KSS) also deeply lagged expectations.
Fading Spirits
“The animal spirits created after the presidential election appear to have given way to increased pessimism about the impact tariffs could have on inflation and economic activity in the US,” Bloomberg Intelligence’s senior analyst Lee Klaskow wrote in a note this week.
“An economy in transition is not good for freight demand,” he said. He noted President Donald Trump’s comments over the weekend that the US economy faces a “period of transition.”