What is the Dow Jones Transportation Average?

Yahoo Finance markets reporter Ines Ferre explains what the Dow Jones Transportation Average and how its component stocks play into the Dow Theory.

Video transcript

- All right. Wall Street is looking to a number of measures of the health of the economy and whether or not there are any signs of a recession. Well, one of those metrics is the performance of the Dow Jones Transportation Average. If we take a look at the performance that transports have under performed the Dow since early February, and many say that might indicate economic weakness. Here to explain is Yahoo Finance's Ines Ferre. Ines?

INES FERRE: The Dow Jones Transportation Average is actually the oldest US stock index still in use today. In fact, the Dow Jones Industrial Average grew out of the Transportation Index, which at one point was mainly composed of railroad companies. Now, the Dow Jones Transportation Average is a price-weighted average of 20 stocks traded in the US.

The index includes airlines like Delta and American, rental companies like Avis, delivery services like FedEx and UPS, and rail and trucking like Union Pacific and Landstar System. The average is seen as a barometer of the health of the economy.

Now, some investors stand by the Dow theory. This theory states that if the Dow rises while the Transport Average falls, that may mean weakness in the economy ahead. Now, when the indices diverge, the market may be anticipating weaker demand for the transportation of goods and services, as would be the case in a global recession.

- It makes a heck of a lot of sense. Ines Ferre, thanks so much.