The Dow Jones Transportation Average, often referred to as the Dow Transports or just “the Transports,” is the oldest known stock index, conceived by Dow Jones & Co. co-founder Charles Dow in 1884. The Transports are also a critical piece of Dow Theory, a longstanding price observation methodology for gauging the health of the U.S. economy and stock market.

But now we have to ask whether the Dow Jones Transportation Average is obsolete, or on its way to becoming so. Two recent developments illustrate why:

  • FedEx (FDX) is more or less breaking up with Amazon.
  • United Parcel Service (UPS) is using self-driving trucks.

These developments are not game changers in themselves. The total size of FedEx’s business with Amazon, relative to revenue percentage, was small on both sides, and the UPS self-driving experiment is still little more than a beta program.

Still, these developments — along with the explosive growth of Amazon — foreshadow a tsunami of change coming straight for the physical transport industry.

And Amazon is only one factor, albeit a large one. Within a few short years, the rise of automation, self-driving vehicles, drones, virtual conferencing, alternative energy solutions, and 3D-printing facilities could change America’s physical transport network so thoroughly that the Dow Jones Transportation Average — unless it changes radically, too — loses all remaining relevance.
We’ll start with the FedEx-Amazon breakup. FedEx appears to have realized that, in the longer term, Amazon is their biggest threat. In fact, multiple transportation and logistics companies could realistically see Amazon as their single biggest threat — which makes it amusing that Amazon is not in the Dow Jones Transportation Average at all.

In June 2019, FedEx announced it would end its air-shipping arrangement for Amazon packages in the United States. About two months later, FedEx said its ground-shipping relationship would end, too, effectively severing all domestic ties with Amazon.

That leaves Amazon on the hook for millions of packages in the upcoming delivery season, but they don’t appear worried. Amazon has been building toward this moment for years.

FedEx sees the writing on the wall in terms of Amazon’s fast-growing shipping and logistics operation. What is truly impressive, and frightening for competitors, is how fast that operation is expanding.

In its first 10 years of existence, for example, Amazon had a grand total of three fulfillment and distribution centers. By 2013 it had 65 of them. That was a pivotal year in that Amazon decided everything on the shipping side had to kick into high gear. As of 2019, Amazon’s total number of fulfillment and distribution centers tops 400. That is 13,000% growth in less than 15 years.

Again, the thing to pay attention to is the rate of change. In 2017, Amazon self-delivered fewer than 15% of its packages according to Rakuten intelligence. In 2019, Amazon delivers nearly half its own packages — a jump from less than 15% to 47.6% as of June this year.

Everywhere you look, Amazon is bulking up. In terms of shipping resources, they are growing faster than a startup. They already had a fleet of cargo planes, for example. Now they are leasing Boeing 737-800s by a dozen-plus at a clip. And they are looking at ocean freight. The flywheel keeps turning faster.

FedEx is responding to this by doubling down on its shipping relationships with Amazon’s competitors — all of the “other guys” in retail, like Walmart and Target and Wayfair, who are trying to keep a toehold in Amazon’s world.

UPS, the delivery juggernaut founded in Seattle in 1907, is responding to future fears with a bet on self-driving trucks. UPS just announced it has quietly been using self-driving trucks for months in Arizona, courtesy of a beta program with TuSimple, a self-driving startup founded in 2015. The venture arm of UPS has also made a direct investment in TuSimple.

How long will it be before millions of long-haul truck-driving jobs disappear? Not long. While human drivers may still be needed, the interplay of automated technology for 90% of activities, with human activity for the remaining 10%, means one driver will have the productive capacity of 10 in the pre-automated world.

When it comes to the tsunami of change headed for the transport sector, e-commerce competition is only the tip of the iceberg. It’s the rapid pace of innovation coming from a diverse range of areas, and the unknown compounding effects from all that change that will turn the sector upside down.

Take drones, for example, or self-driving vehicle technology at the car and van level. Amazon is already making huge investments in small-business package delivery startups, encouraging entrepreneurs and employees to start their own shipping businesses.

The idea here, in terms of Amazon building out a nationwide last-mile network, is to help move millions of packages on a 24-hour or same-day basis. (The Amazon Prime shipping service, by the way, is estimated to have 105 million members. If you assume one member per household, that would cover more than 82% of households in the United States.)

When self-driving technology and drone technology get up to speed, Amazon will have the benefit of a basic structural framework for fast autonomous delivery through all those local businesses — which can then be upgraded or swapped out entirely with automated processes.

Nor does it stop there. The 3D-printing revolution could be even more dramatic for the transport industry.

A few years back, 3D-printing technology made a big splash and then belly flopped. But this wasn’t due to fatal flaws in 3D-printing as a technology. Instead the timing of the rollout and the business model rollout was just wrong.

The debut was too early — 3D-printing technology wasn’t really ready for the hype — and the emphasis was on 3D printers in people’s homes, another idea that was off-base.

So imagine, instead, massive 3D-printing production centers sitting next to warehouse distribution centers on the outer edges of a city. With this model, the 3D printing is done efficiently and professionally at high volume. The e-commerce distribution center, meanwhile, doesn’t have products flown or shipped in. Instead they are created next door.

In this configuration, the pathway from 3D assembly, to packing center, to drone or self-driving van transport, to the consumer’s doorstep, is about as short as possible.

And still, that is only the tip of a very large iceberg. The rise of high-fidelity videoconferencing, to the point where full-size video feels the same as being with someone in a room, will greatly reduce the need for physical travel. The scaling up of local alternative energy outputs, like solar and wind, will reduce the need for fossil fuel transports. And a rise in digital entertainment — with augmented reality and on-demand virtual reality as the next steps — will further reduce the need to move physical “stuff” at all.

To stay relevant, the Dow Jones Transportation Average may have to change its composition radically.

What happens, for example, if traditional trucking companies lose out to some giant new player on the self-driving side? What happens if giant pieces of the transport network are taken over by local municipalities, with, say, fleets of self-driving cars operated under contract by city government?

Technology has already had a scrambling impact on economic indicators. Central banks no longer understand inflation, for example — or rather the persistent absence of inflation — because they don’t know how to measure technology’s impact as a deflationary force (in the general way that it lowers prices).

In this sense, technology could wipe out the value of the Dow Jones Transportation Average as an economic barometer for the health of the economy. The fact that a number of old-world airlines and trucking and shipping companies are struggling might no longer be relevant to the United States economy in the 21st century.

The Transports, as a group, will also be useful to watch and analyze through a “disruptors versus the disrupted” lens. Some companies that are now in the Dow Jones Transportation Average will navigate the coming tsunami of change successfully, and emerge as big winners on the other side. Others in the index will fail spectacularly, as their competitive edge erodes and their business model rusts.

No matter what, technology is making it increasingly tough to extract useful signals from old economy business models and health barometers. As the pace of change accelerates, it gets harder and harder to analyze and quantify the downstream impacts of that change.

We will continue to monitor the Dow Jones Transportation Average with a keen eye — but more for the dynamics of winners and losers among the components as a tsunami of change sweeps across the transport sector, rather than seeking a traditional signal from the behavior of the index itself.

These kinds of deep structural changes in market dynamics are happening all over the place as technology continues to upend conventional wisdom. It’s a further reminder that, as individual investors, we need to rely on technology ourselves now more than ever to help guide our investment decisions so that we’re not relying on outdated models of market behavior.

Keith Kaplan
CEO, TradeSmith