Greetings from 35,000 feet, somewhere between the volatile North American charts I just left and the shifting macroeconomic landscape of Europe or – in this case, London. Writing from this altitude often provides an accidental dose of perspective, and this week, we need it. The 40-day Iran war has been absolutely exasperating for advisors and clients alike and reached a climax (hopefully) with the incredulous “end of civilization” truth social message on Tuesday. At the time of writing, the ceasefire was holding on by a thread but holding. A perfect time to pivot from that storyline to something more specific to the equity market. In this case, the divergence that has opened up between a major US stock index and one of its sub-groups. A divergence that might have a message for general market direction going forward.

The benchmark this week is the Dow Jones Index and while it doesn’t carry the same weight as decades ago (thanks to the tech-heavy S&P500), it remains a good barometer. The subgroup in focus is the Dow Transportation Average. As you can see in the following chart, the visual distortion is stark. Thanks to the ceasefire-induced relief rally in equities, the Dow Jones is now back in the green this year, with a 5.5% gain as of Thursday, compared to a still modest decline in the S&P and on par with the TSX. Not bad, unless you are comparing it to the Dow Transports Index, which is up a whopping 17.8% year-to-date as of Thursday’s close.

Normally, we would interpret such a move in a cyclical-heavy index as sign of robust economic health in the U.S.  Weaker employment growth? High energy prices and margin compression of increasing costs? Forget about it. Transportation is the lifeblood of the economy and if the market is going to value this segment higher, it must mean that things are going to be just great. Or does it? The problem is that this isn't just a simple lead indicator play and before we chase this momentum, we need to apply the lens of 2025. This isn't a breakout—it’s a possible mean reversion trap.

To understand why I’m not celebrating an 18% rally, we have to remember where we were 12 months ago. In 2025, while the Dow Industrials were compounding consistent gains, the transports were basically a dumpster fire. The sector spent the better part of last year in a freefall, dropping roughly 17.5% as the tariff party injected doubt into the resiliency of the US economy. There was also an "Amazon-exit" trauma that hit UPS, while economic uncertainty and still elevated interest rates choked the railroads.

Viewed over a longer horizon, this year’s massive 17.8% rally is essentially a recovery from last year’s losses. While the Industrials have moved steadily higher, the Transports have spent over a year doing a giant "V-shape" just to break even. This isn't a sign of a booming economy; it’s a sector finally waking up from a deep sleep.  In the chart below, we are again looking at the Dow and Dow Transports indices, this time back to the start of 2024. Both peaked in late-2024, before backsliding during the initial months of the Trump administration. By last August, the Dow had returned to its 2024 high, while transports remained in slumber land until later in the year. During the current crisis, they have definitely added to the rebound.

Even within this "recovery," the data is heavily distorted. Since Uber replaced JetBlue in February 2024, it was expected to act as a tech-driven growth engine for the index. Yes, since February 26th of that year, JetBlue has dropped almost 23%, but Uber hasn’t exactly been stellar either. In fact, the stock is down roughly 13% year-to-date. The real "Uber mask" here is that the index is actually hiding a massive, narrow surge in one specific name – FedEx (FDX).

With a 29.8% year-to-date gain, the company’s restructuring initiatives have won back the analyst community, allowing it to build on the modest 2.7% gain in 2025 (still a lot better than the transport group as a whole). But FedEx isn’t the only driver behind what we are seeing.  In addition to the recovery in the rails, have a look at that perennial rental car favourite, Avis Budget Group (CAR). This stock jumped more than 5% on Thursday and it is up close to 200% since March 20th. And you thought the Artemis ride was a moon shot, as you can see in the chart below.

Indeed, this jump in Avis Budget is a classic “short squeeze”. With the economy set to cool off and employment conditions weakening, prospects for car rental revenues weren’t great. That is, until a partial government shutdown left 50,000 TSA workers without pay, leading to congested airports and heated tempers. Rather than put up with long lines and delays, travellers swapped their plane tickets for rental cars. Result, a surprising and welcome shot in the arm for the likes of Avis Budget.

Okay, so we have a strong advance in a cyclically important segment of the market that looks more like mean reversion head fake than a true signal of strength. But there is something else happening below the surface and it has to do with how transportation companies are making money in this crazy environment.  Given that overall economic activity has moderated, especially in the wake of the Iran war, shipment volumes are under pressure.  The Cass Freight index, which measures the number of shipments across all modes of transportation (truck, rail, sea and air) is down about 7% from the same period a year ago.

So why are transport stocks up? Pricing power. With diesel prices stubbornly high over $5.50 per gallon in the US, companies have been aggressive with fuel surcharges. These surcharges inflate the "top line" revenue numbers, giving the appearance of growth. In reality, it is cost-push inflation. The movers are getting paid more to move less, and that bill is being footed by the makers (Industrials).

In summary, Dow Theory tells us that a bull market is only confirmed when both the Industrials and the Transports hit new highs together. That looked to be the case towards the end of February, but someone threw us a middle eastern curve ball. The fact that transports are trading at all-time highs says nothing in terms of validating this week’s bounce in stocks, especially with the lack of breadth in the group. The FedEx story is great, but the success during the holiday season is going to be hard to match if the Iran war becomes protracted. As for rental car demand, it is hard to imagine that the restricted funding of TSA workers will continue much longer, considering that the mid-term elections are approaching faster than some in Congress would like.

It’s easy to look at a blowout number like 18% for a sector and get excited.  There might even be a little FOMO (fear of missing out) feeling going on, but don’t let the headline number fool you. We are looking at a sector that is expensive, narrow-driven, and struggling with volume. Until the Industrials prove they can handle the "transport tax" being levied by these fuel surcharges, Ally and I remain defensively positioned. In this market, you need to be careful that a "catch-up" isn’t just a prelude to a "catch-down."

On behalf of the Pyle Wealth Advisory team, have a wonderful week.     

Andrew Pyle