Freight Index vs S&P 500
- Posted by ToddSullivan
- on July 14th, 2014
Instead of listening to talking heads on TV all day trying to be as melodramatic as possible to drum up viewership, investors would be doing themselves a far greater service to just simply look at the data themselves….
For an economic indicator the Transportation Freight Index (TFI) has an interesting pattern. When it has risen off its lows in the last 2 recessions, it did so roughly in line with the lows of the SP500. But, there are better indicators which correlate with market lows. The correlation with SP500 highs is a different matter and is worth a closer look for what this indicates today-see the chart below.
Firstly, I need to remind all that nothing about investing markets is precise no matter how much math one uses in the argument. Even though the TFI record is only from 2000, it can be seen to rise from recession and then level out once the economy has reached a point one could call ‘recovered’. We can see a level period January 2005-January 2008 when the economy was in a level growth mode. The SP500 (.INX) rises with a rise in this indicator and continues to rise as the economy exits recovery and moves higher while the TFI simply holds its upper level. Do you see this?
Once we have achieved recovery, we will more fully utilize transportation services for construction related goods which include, cement, various form of stone, steel, lumber, appliances, roofing materials and many other bulky items best transported by train and truck. Once we move to capacity levels in shipping these goods, the TFI levels out and the economy grows till our needs for new housing, commercial space and infrastructure have been satisfied. Usually there is some inflation associated with this process as demand builds to exceed supply as the economy hums along at a good level. Rail being the lowest cost per mile for many construction goods becomes a limiting element. Shipping prices rise as it is impossible to rapidly add new rail capacity to meet society’s needs. What we see in the TFI is a leveling off pattern due to capacity constraints while the economy continues to expand.
At the moment the TFI remains in an uptrend and shows no inclination of leveling off. This is due to the economy not being fully recovered. What remains missing is a full recovery in Residential and Commercial Construction. These sectors of our economy represent a significant contribution to normal employment. Once these sectors move to operating in line with a recovered economy we will have additional and substantial improvement in the numbers of individuals working, personal income, retail sales and etc.
What the TFI indicates is that we have quite a ways to go in the current economic cycle before we are in excess. Demand has yet to exceed supply. There are few economic constraints EXCEPT for bank lending. Once the Fed gets out of the process of keeping the mortgage rates low and these rates rise, bank lending will expand and Residential and Commercial Construction sectors will recover. So will our economy!!
From my perspective it is very hard not to be optimistic about rising equity markets ($SPY).
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Todd's investing strategy is essentially long with the rare short. He seeks to buy undervalued issues with an upcoming catalyst that will help them realized.... More »
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