Airline and hotel stocks have surged this year, thanks in part to a wave of long-awaited revenge spending, or what some call the YOLO economy. A travel company ETF run by investment firm SonicShares, with the symbol “TRYP”, is up nearly 6% this year while the S&P 500 has fallen 9%.
United ( and )American ( both reported strong earnings earlier this week. Shares of )Marriott (, )hilton ( and )Wyndham ( are close to historic highs. Theme park owner )sea world ( is not far from a record, too. And the actions of cruise operators )Norwegian ( and )Royal Caribbean ( are both up this year despite the massive market sell-off. )
These companies are thriving despite soaring consumer prices and many Americans having a negative view of the economy due to skyrocketing inflation and rising interest rates.
But Garrett Melson, portfolio strategist at Natixis Investment Managers, told CNN Business that looking at actual spending patterns is more important than consumer confidence numbers.
Take the Worry out of Inflation and Rising Rates…for Now
“When you look at sentiment, it’s in the basement. There’s a lot of negativity. Inflation is in the driver’s seat,” he said. “But consumers are still spending thanks to excess savings and pent-up demand.”
Inflation is obviously a concern, Melson added, especially as more and more investment banks are predicting that Fed rate hikes could eventually lead to a recession. But he thinks consumers, tired of being cautious, aren’t yet worried about a potential downturn.
“People want to go out and do things they haven’t done in two years,” he said. “They will complain about the prices but they will still spend.”
And they apparently spend a bundle with their credit cards.
American Express ( said in its first-quarter earnings report on Friday that travel and entertainment spending grew 121% from a year ago and “essentially reached pre-pandemic levels globally for the first time in March, thanks to continued strength in consumer travel.” )
What emotion drives the actions? Check the Fear and Greed Index
AmEx reported particularly strong demand for its Delta (-brand cards. )
Still, a potential economic downturn could hurt consumer stocks…no matter how badly people want to get out and do things.
Citi leisure and travel analyst James Hardiman said in a report this week that while “leisure space is generally best avoided in a recession”, some companies are likely to be “significantly more dynamic than others”.
Hardiman added that if a recession is short and shallow, many of these companies could “become compelling top performers, particularly if they show resilient earnings capacity throughout.”
For example, it has “buy” ratings on a shipping company Braunschweig (whose resilience is, according to him, “underestimated”, as well as manufacturer of snowmobiles and all-terrain vehicles )Polaris (. )
Hardiman also thinks “the stability of theme park demand should shine in a declining macroeconomic environment, and” has “buy” ratings on six flags ( and )Cedar Fair (which owns more than a dozen theme parks in the United States and Canada. )
He may be right about that, but it’s worth remembering that investors tend to bail out hot sectors and stocks once a trend seems to be playing…even if the fundamentals are still right. Just look at what has happened to some of the market’s favorite work-from-home and housing stocks in recent times.
The actions of such pandemic darlings as Zoom (, )Roku ( and )Teladoc ( have all plunged from their Covid highs and are now trading lower than two years ago when the pandemic began. If the economy slows faster than expected, travel and leisure stocks could suffer the same fate. )
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