• The Dow Jones Transportation Average has plunged over 20% from its record high, technically entering a bear market.
  • The index is used by some investors to measure the health of the economy's health, including as a possible recession indicator.
  • According to Dow Theory, the Dow Jones Industrial Average should follow the Transportation Average.

A key stock-market indicator of the health of the US economy has fallen into a bear market this week as investors punish transportation stocks in the face of sky-high fuel prices and slowing growth.

The Dow Jones Transportation Average has been under pressure since the start of this month. Another 3% drop on Wednesday brought losses since November's record high of 18,246 to 20% — the technical definition of a bear market.

The index, whose origins date back to the late 19th century, is made up of transportation stocks, from logistics companies such as FedEx and UPS, airlines, to railroad operators like Union Pacific. And, as such, it can act as a bellwether for the health of the underlying economy.

What's more, Dow Theory – a financial theory named after the father of technical analysis, Charles Dow — suggests that the transportation index and the Dow Jones Industrial Average tend to move in tandem. Because transportation is such an integral part of everyday economic activity, if it struggles, it can be symptomatic of the broader economy struggling. The Dow Jones is only 7% off record highs, but the theory says when the two move in the same direction, it will generally be the transportation index that leads the way.

Growth is still holding up, the economy is generating jobs, but with inflation at 40-year highs, astronomical fuel costs, in part because of Russia's war in Ukraine, and soaring prices for everything from oranges to bread, consumer spending is under pressure and the Federal Reserve is intent on acting as aggressively as possible to avoid a slowdown.

Deutsche Bank is the first big bank to say it now expects the US to fall into recession in 2023.

"A mild recession will be needed to take sufficient steam out of the economy and labor market to bring inflation back down," the bank's analysts said  on Wednesday.

Another market-based indicator of economic health, the Treasurys yield curve, has also been flashing red this week. 

That doesn't mean recession is a given, but a growing number of market watchers are saying the chances are growing.

"Recession is a rising risk and we see perhaps a 30% chance of that happening in the next 12-18 months," ING chief international economist James Knightley said.

Data from the American Trucking Association for February, which does not capture the impact of oil prices hitting 14-year highs in March, shows this was the first month since last July that trucking tonnage did not increase.

Shares in delivery firm FedEx have fallen by more than 20% since the start of the year, while those in rival UPS have lost about 11% in value, compared with a 6% drop in the Dow Jones. 

The cost of fuel has been a major drag. The price of diesel, the primary fuel for trucks, is around $5.071 a gallon, just below March's record high of $5.135 and about 65% higher than it was this time last year. 

The Fed must act quickly to stave off a damaging inflation spiral and some strategists worry it may have missed the boat in terms of using monetary policy to cool off inflation without triggering a recession.

"The Fed is now front-loading and likely to take big steps in tightening monetary policy at the May meeting. However, as the economic outlook is deteriorating they may already be too late," Philip Marey, who is senior US strategist for Rabobank, said in a recent note.

"The recent inversions of the yield curve suggest that this hiking cycle is going to end prematurely and could very well be followed by another recession," he said.

Read the original article on Business Insider