Ron Insana: A key market indicator is flashing a warning signal about the economy

The U.S. economy may be starting to crack, according to the recent performance of two notable stock indexes. The Dow Theory, which is over a century old, suggests that the behavior of the Dow Jones Industrial Average and the Dow Jones Transportation Average could send important signals about the health of both the market and the economy. Here’s why. The Dow Industrials represent the productive capacity of the economy, as its original focus was on the goods-producing sector. Over recent decades, the 30-stock Dow Industrials has been expanded to include important tech, telecom and services companies. Still, even in its current construction, the index represents economic output. The Dow Transports, whose constituents move goods and passengers across the country and around the globe, represent final demand. That’s because these companies are among the first to feel the effects of a slowdown in business and consumer activity. When the two averages are moving up in tandem, that’s believed to be a good sign for the market and the economy. When they diverge, as they have right now, it could be an early warning signal. This is especially the case when the Transports are weak while the Industrials are strong. .DJI .DJT YTD line The Dow Industrials vs. Dow Transports in 2024 At the moment, the divergence is relatively mild. As of Wednesday’s close, the Industrials are up about 3% in 2024, while the Transports are down 3%. However, this could be an early indication that demand is weakening while production continues apace. This could potentially lead to a supply/demand imbalance that is often rectified by slower economic growth or — sometimes — a recession. Such a divergence could imply a supply glut is in the offing. That could force manufacturers to cut back on production and lay off workers. We’ll see. Utilities’ recent outperformance It’s also interesting to note the action in the Dow Jones Utility Average , which is outperforming Transports and Industrials. .DJU YTD mountain The Dow Jones Utility Average in 2024 While it’s not officially a component used in Dow Theory analysis, the recent rally in utility stocks — which are very interest rate-sensitive — might be sending a similar signal of slowing growth and falling rates. Even amid the market’s concerns over the Federal Reserve potentially delaying rate cuts in 2024, the Dow Utility index is up 6% this year. It has also rallied about 19% from its closing lows in October, a somewhat unusual move given recent concerns about the rebound in both inflation and interest rates. Take all three Dow averages together, and one might envision a flashing yellow sign with respect to the rebound in stocks, the economy’s strength and the belief that rates will remain higher for longer. Again, the moves are not nearly as pronounced as they are in periods when the divergences are so wide that they indicate a sell signal. Nevertheless, it’s an indicator that’s worth watching in the weeks and months ahead. Should these signals gather strength, it could be time to rethink hopes for a soft landing, as well as the sticky inflation scenario and the “higher for longer” situation. The Dow Theory might still have the benefit of experience and wisdom. Or it may be another case of “What is old is new again.” — CNBC contributor Ron Insana is CEO of iFi.AI, an artificial intelligence fintech firm.

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