Transportation stocks are showing bullish signs for the broader market

Transportation stocks have been rising rapidly, a sign of optimism about the strength of the economy that could fuel a broader market rally.

Companies that operate trains, planes, ships and trucks tend to see their prospects brighter when a growing economy drives demand for goods, materials and travel. For that reason, some investors see the performance of transportation stocks as an indicator that a robust business environment it will support profits in all industries.

This month, the Dow Jones Transportation Average, which tracks 20 large US companies, from the delivery giant

United Parcel Service Inc..

UPS 1.23%

to the railway operator

Pacific Union corporation

ONE P 0.14%

, has been ahead of other market indicators. The transportation average advanced 7.3% in March, compared with a 2.9% gain for the Dow Jones Industrial Average and a 3.9% gain for the S&P 500.

The rebound is a promising sign for investors worried about how the US economy will fare as the Federal Reserve begins to raise interest rates to combat high inflation.

“It suggests that maybe the US economy is more resilient or more firmly grounded than some people realize,” said Michael Arone, chief investment strategist at State Street Global Advisors.

Fed Chairman Jerome Powell has said the central bank is prepared to raise interest rates. high enough to slow the economy if you determine what is needed to bring down inflation. Some analysts have pointed to the yield convergence in short and long-term US government bonds as a worrying sign that the bond market is close to predicting a recession.

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The recent rally in transportation stocks has helped the group almost recoup its year-to-date losses: the benchmark is down just 0.6% in 2022, versus a 4.1% loss for the Dow. Industrials and a 4.7% drop for the S&P 500. The big-tech Nasdaq Composite has suffered further from expected interest rate hikes and is down 9.4% in 2022.

Among the stocks driving the rally are shipping companies

matson inc.

MATCH -0.16%

, 35% more so far this year; car rental company

Avis Budget Group Inc..

CAR -2.42%

, 27% more; barge operator

Kirby Corporation.

KEX -1.01%

, 24% more; and Union Pacific, 8.5% more.

The Dow Transportation is 3.8% below its November record, closer than the major US stock indexes to their highs.

Upload activity has increased of late to reverse some of the decline seen during the rise of the Omicron variant of Covid-19. Seasonally adjusted, US shipping volumes in February recovered almost half of the drop suffered the previous month, according to the Cass Freight Index.

There are also signs of pricing power.

FedEx Corp..

fdx 0.93%

recently reported stronger-than-expected quarterly sales after higher shipping rates offset shipping fewer packages overall. Shares of the delivery company rose 1.9% in March but are down 12% year-to-date.

Airline executives have said travel demand is recovering, and who believe customers are willing to pay more to cover higher fuel costs. Carrier stocks are mixed this year, with

Alaska Air Group Inc..

ALK -0.78%

up to 10% and

American Airlines Group Inc..

ALA -0.09%

down 5.3%.

“When airlines tell you they’re in high demand, that tells you they’re looking at a very strong consumer with dollars available to travel,” said Michael Farr, CEO and founder of investment management firm Farr, Miller & Washington. “That gives you an indication that the consumer will spend in other areas of the economy as well.”

Union Pacific is among the transportation stocks driving the rally.


Photo:

Lucas Sharrett/Bloomberg News

One problem for investors looking to Dow transportation for information about the market in general: the Avis popularity with online merchants it has tilted its actions toward outsized moves that at times seem disconnected from the economic outlook.

That volatile stock market performance has made Avis the biggest contributor this month to earnings for the price-weighted shipping average, according to Dow Jones Market Data. Avis shares rose 22% on March 16 after the company added $1 billion to its share repurchase authorization.

But shares of the rental car company are still 26% below the Dow Jones Transportation Average’s Nov. 2 record, and Avis has subtracted more points from the index since that time than any other member.

The biggest point contributors since the November high are Matson, Union Pacific, Kirby and the load leader.

JB Hunt Transport Services Inc..

JBHT -0.38%

—firms that move goods and merchandise through the economy.

Shares of shipping carrier Matson are up 35% so far this year.


Photo:

Tim Rue/Bloomberg News

Email Karen Langley at karen.langley@wsj.com

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