A new use for an old index

For much of the past century, many market experts believed upward gains in both the Dow Jones Industrial Average and the lesser-known Dow Jones Transportation Average provided proof of a bull market.

The theory was that if the industrial economy produced goods, then they would be shipped out - most often on railroads. Shipments up? The entire economy was prospering.

But today, that linkage doesn't always hold true for the economy, some analysts say.

The Dow Jones Industrial Average, notes market watcher Larry Wachtel, of Prudential Securities Inc., is now "dominated by technology firms." And the transportation index "is dominated by airlines," which derive most of their profits from business and leisure travel, not from heavy industry.

So today, the indexes may actually say more about how the firms that make up the index are doing than broader trends in the US economy. (The two indexes are both up in recent weeks.)

Still, one indisputable link has lasted, says Mr. Wachtel: "that between pure industrial production and the railroads." Large industrial products still tend to be shipped by rail (or trucks). So if industrial manufacturing holds steady or improves, the rails should do so, too.

In the transportation index, railroads have recently posted gains, while airlines have dropped. Bottom line: The transportation index still has its uses, highlighting strength in the industrial sector rather than the overall economy.

(c) Copyright 2001. The Christian Science Monitor