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Street Signs: The Wrong Side of the Tracks

May 28, 2019

One way to “track” the economy is to measure railroad shipments. Holding all else equal, the more railcars we see moving, the healthier the economy tends to be. In fact, Warren Buffett has dubbed this his “Desert Island” indicator; if he had to look at just one thing -which we would never do -this would be it.

So is this effective and, if so, what does it tell us today?

According to the Association of American Rail Roads, traffic is down about 4% year-over-year. In the past this has not been a great month for stock returns.As you can see below, stocks do about 3x better in months when we see more railcars moving in the US. However, if this softening leads to government stimulus, a better entry point for stocks may materialize.

12 Month Rate of Change in North American Rail Traffic graph

Given the softening we have observed in the economy, we’ve been reducing exposure to industrial and transport stocks.Instead we’ve been adding safer investments like Bonds, Utilities, Real Estate, and Energy stocks to client portfolios.

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