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Transportation and industrial shares show U.S. is on a slow road to recovery

A United Parcel Service truck in Palo Alto, Calif.

Paul Sakuma

Transportation and industrial shares are diverging in the United States, a signal that equity investors are starting to agree with what the bond market already knows: the U.S. economic recovery will remain sluggish for months to come.

The Dow Jones transportation average fell 3.9 per cent between Feb. 3 and March 9, while the Dow Jones industrial average added 0.5 per cent. The split between the indexes is considered significant because market lore says the transportation and industrial averages must move higher in tandem for market rallies to last.

The transportation gauge consists of 20 railways, trucking companies and airlines ranging from FedEx Corp. to United Continental Holdings Inc. It peaked before the rest of the market when the technology bubble popped in 2000 and began slipping into a bear market three months before broader benchmark indexes in 2007.

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"In a healthy market, everything is going in the same direction," Bruce Bittles, chief investment strategist at the Milwaukee-based money manager Robert W. Baird & Co., said. "When that starts to diverge, that raises a flag that potential trouble may be brewing."

Laszlo Birinyi, the founder of market watcher Birinyi Associates Inc. in Westport, Conn., said last week that declines in shipping and smaller companies don't necessarily mean the rally is ending. He remains bullish, based on an analysis of market-cycle lengths. He says this rally must last another year to match the average length of bull markets since World War II.

But U.S. Treasury yields have been stuck near historic lows for months, indicating that fixed-income investors are cautious about the pace of economic growth and are seeking shelter in government bonds.

"You have this bipolar world with very different views on the direction of global economic growth," Wayne Lin, a money manager at the Baltimore-based fund firm Legg Mason Inc., said. "I tend to lean a little more on the bond side just because I see that earnings growth is starting to turn over and there seem to be decelerating economic activities in Europe."

While S&P 500 companies exceeded analysts' profit forecasts for a 12th straight quarter, earnings-per-share for the 472 companies that reported since Jan. 9 rose 4.9 per cent, the slowest rate since 2009.

The U.S. economy will expand 2.2 per cent this year, according to the median forecasts of 79 economists in a Bloomberg survey. While the pace is up from 1.7 per cent in 2011, it's less than the 3.7 per cent average from 1983 to 2000.

"The economy is going to strengthen, but it's going to be a subpar recovery," Jeffrey Saut, chief investment strategist at Raymond James & Associates in St. Petersburg, Fla., said. A level of "1,400 is doable this year on the S&P. Beyond that, we have to see how strong the recovery is," he said.

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In the two previous bull markets, shippers peaked ahead of other stocks. While the technology bubble didn't end until March 2000, the Dow transport average was already down 29 per cent at that point from its peak 10 months before.

In the recent financial crisis, the measure began its retreat three months before the S&P 500 hit a high of 1,565.15 on Oct. 9, 2007 and gave way to the worst economic contraction since the Great Depression.

Most analysts don't see the recent decline in the index as being as worrisome as those previous falls.

"This is probably the start of something of a short-term topping process for the S&P 500," Gina Martin Adams, a strategist at Wells Fargo Securities LLC in New York, said. "We're not suggesting it's anything more onerous than a signal that we probably have a little bit of a correction coming."

Bloomberg News

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