Transportation stocks are giving bullish signals to a broader market

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

Companies that operate trains, planes, boats, and trucks tend to see better prospects as a growing economy boosts demand for goods, materials, and travel. For this reason, some investors are looking at transportation stock performance as an indicator that a resilient commercial environment will support cross-industry gains.

This month, the Dow Jones Transportation Average, which tracks 20 major US companies, was boosted by delivery giant United Parcel Service Inc.

UPS 1.95%

to the railway operator Union Pacific corp

UNP 0.72%

, has jumped ahead of other market benchmarks. The transportation median rose 8% in March, compared to a 3.1% rise in the Dow Jones Industrial Average and a 4.6% rise in the S&P 500.

The rally is an encouraging signal for investors worried about how the US economy will fare as the Federal Reserve begins to hike interest rates to combat high inflation.

“It suggests that the US economy may be more resilient or on better footing than some people would give it credit for,” said Michael Arone, chief investment strategist at State Street Global Advisors.

Fed Chair Jerome Powell said the central bank stands ready to raise interest rates high enough to slow the economy if it determines it needs to do so to bring inflation down. Some analysts have pointed to the convergence of short- and longer-dated US Treasury yields as a worrying sign that the bond market is on the verge of predicting a recession.

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The recent rise in transportation stocks has helped the group erase its year-to-date losses: the benchmark closed 2022 up less than 0.1% on Monday, versus a 3.8% loss for the Dow Industrials and down down 4% for the S&P 500. The tech-heavy Nasdaq Composite has suffered even more amid expected rate hikes, falling 8.2% in 2022.

Stocks driving the recovery include ocean freight operator Matson Inc.

MATX 0.19%

, up 35% year to date; Car Rental Avis Budget Group Inc.

DARE -1.33%

, up 25%; Ship operator Kirby Corp.

KEX -0.49%

, up 23%; and Union Pacific by 9.3%.

Dow transports are down 3.3% from their November record, closer than major US stock indexes to their highs.

Cargo activity has risen recently to reverse some of the decline seen during the surge in the Omicron variant of Covid-19. According to the Cass Freight Index, seasonally adjusted US shipping volume in February recovered almost half of the previous month’s decline.

There are also signs of pricing power. fedex corp.

FDX 1.54%

recently reported stronger-than-expected quarterly sales after higher shipping costs offset fewer packages shipped overall. Shares of the delivery company are up 3.5% in March but are down 11% year-to-date.

Airline executives said demand for travel is recovering and they believe customers are willing to pay more to cover higher fuel costs. Airline stocks have been mixed this year, with Alaska Air Group Inc.

ALK -0.44%

by 9.8% and American Airlines Group Inc.

EEL 1.70%

down 3.7%.

“When airlines tell you they have huge demand, it means they see 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 be spending in other areas of the economy as well.”

Union Pacific is among the transportation stocks driving the recovery.


Photo:

Luke Sharrett/Bloomberg News

A problem for investors looking to Dow transports for insights into the broader market: Avis’s popularity with online traders has prone its shares to make outsized moves that sometimes seem detached from the economic outlook.

This volatile stock market performance has resulted in Avis being the top contributor to gains in the price-weighted transportation average this month, according to Dow Jones Market Data. Avis shares rose 22% on March 16 after the company increased its share buyback authorization by $1 billion.

But the rental-car company’s shares are still 27% below the Dow Jones Transportation Average’s Nov. 2 record, and Avis has since deducted more points from the index than any other member.

The biggest contributors since the November high are Matson, Union Pacific, Kirby and leading freight carrier JB Hunt Transport Services Inc. — companies that move goods and commodities through the economy.

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Shares of ocean shipping company Matson are up 35% year-to-date.


Photo:

Tim Rue/Bloomberg News

Write to Karen Langley at karen.langley@wsj.com

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