By Lewis Krauskopf

NEW YORK (Reuters) – It’s been a banner year for the major U.S. stock indexes, but one economically sensitive corner of the market sticks out as a sore spot.

The Average has fallen about 5% so far this year, a significant contrast with the 9% year-to-date rise for the benchmark and the 1% rise in the , which topped 40,000 points for the first time this month.

While major indexes including the S&P 500, the and the Dow have all set new all-time highs this year, the Dow transports have yet to top their November 2021 record, and are some 12% below that level.

Some investors said the struggles for the 20-stock transport index – which includes railroad operators, airlines, package shipping companies and trucking firms – could signal weakness in the economy or prevent the broader market from making significant further gains unless they bounce back.

The Dow transports are “a barometer for future economic activity,” said Chuck Carlson, chief executive officer at Horizon Investment Services. “They may be indicating that while a recession isn’t imminent, that there is probably a slowdown in the economy that’s ahead here.”

The weakness in the transports is an example of how gains in the tech-led S&P 500 – propelled by megacap stocks such as semiconductor giant Nvidia (NASDAQ:) – may be overshadowing weaker performance in other corners of the economy following the Federal Reserve’s most aggressive monetary policy tightening in decades.

Other areas that have struggled include small cap stocks, which some analysts believe are more sensitive to economic growth than large caps, as well as real estate shares and some high-profile consumer stocks such as Nike (NYSE:), McDonald’s (NYSE:) and Starbucks (NASDAQ:).

Data this week showed the U.S. economy grew at a 1.3% annualized rate in the first quarter, down from the 3.4% fourth-quarter 2023 pace. A key test for the economy’s strength and for markets comes with the June 7 release of the monthly U.S. jobs report.

Among the Dow transports, the biggest year-to-date laggards are car rental company Avis Budget (NASDAQ:), off 37%, trucking firm J.B. Hunt Transport, down 21%, and American Airlines (NASDAQ:), off 17%.

Shares of major package shipping companies UPS and FedEx (NYSE:), are down 13% and 1% respectively, while rails Union Pacific (NYSE:) and Norfolk Southern (NYSE:) have both slumped about 7%. Only four of the 20 components have outperformed the S&P 500 so far this year.

Matthew Miskin, co-chief investment strategist at John Hancock Investment Management, said it could be harder for the broader market to break significantly higher unless the transports pick up steam.

“There is something to be said about the guts of the market not necessarily confirming all-time highs in the overall S&P 500,” Miskin said. “So softness in some of the transports, I think do warrant some caution.”

Stocks have pulled back this week, with the S&P 500 down more than 2% from a record high set earlier in May, with rising bond yields causing concern about equity performance.

Not all investors believe the transport index is reflective of the broader economy. The index is price-weighted, like the Dow industrials – as opposed to weighted by market value like many indexes – and includes only 20 stocks.

Meanwhile, another group also considered to be an economic bellwether – semiconductors – has fared much better.

The Philadelphia SE semiconductor index has gained 20% this year, as investors flock to Nvidia and other chip companies poised to capitalize on excitement over the business potential of artificial intelligence. The overall market trend remains bullish for Horizon’s Carlson, who tracks the Dow transports and Dow industrials together to determine market trends, known as “Dow Theory.” But the fact that the transports closed at their lowest point since November on Wednesday is worrisome, he said. “It’s not to say that the industrials and the broad market can’t continue to move higher,” Carlson said. “But the probability of doing it in a sustained way, I think, decreases with the transports making new intermediate lows.”