Airline and hotel stocks have soared this year in part thanks to a spate of long-overdue revenge spending, or what some are calling the YOLO economy. A travel company ETF operated by investment firm SonicShares with the ticker symbol “TRYP” is up almost 6% this year, while the S&P 500 is down 9%.United (UAL) and American (EEL) both reported strong gains earlier this week. shares of Marriott (TO DAMAGE), hilton (LDS) and Wyndham (WH) are near all-time highs. Amusement park owner Water world (SEAS) is also not far from a record high. And cruise line stocks Norwegian (NCLH) and royal caribbean (RCL) are both up this year despite the sell-off in the broader market.
These companies are thriving despite the fact that consumer prices are skyrocketing and many Americans have a gloomy view of the economy due to skyrocketing inflation and rising interest rates.
But Garrett Melson, a portfolio strategist at Natixis Investment Managers, told CNN Business that it’s more important to look at actual spending patterns than consumer confidence numbers.
Shake off inflation and rate hike worries… for now
“If you look at the mood, it’s in the basement. There is 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, as more and more investment banks are predicting that Fed rate hikes could eventually lead to a recession. But he believes consumers, tired of being cautious, are not yet worried about a possible downturn.
“People want to get out there and do things they haven’t done in the last two years,” he said. “They will complain about the prices, but they still go out to spend money.”
And they apparently spend a bunch with their credit cards.
American Express (AXP) in its first-quarter earnings report on Friday, said travel and entertainment spending rose 121% a year ago and “reached essentially pre-pandemic levels globally for the first time in March, reflecting continued strength at consumer travel is due”.
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AmEx reported particularly strong demand for its delta (DAL)-branded cards.
Still, an eventual economic slowdown could hurt consumer stocks…no matter how much people want to get out and do things.
Citi leisure and travel analyst James Hardiman said in a report this week that while “the leisure space is generally to be avoided in the event of a recession,” some companies are likely to be “significantly more buoyant than others.”
Hardiman added that when a recession is short and superficial, many of these companies “could become compelling early-stage plays, especially if they consistently demonstrate resilient earnings power.”
For example, he has “buy” ratings for boat companies Brunswick (B.C)whose resilience he said is “underestimated,” as well as manufacturers of snowmobiles and ATVs Polaris (PII). Hardiman also believes that “the stability of theme park demand should shine in a declining macro environment and has “buy” ratings Six flags (SIX) and cedar fair (FUN)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 exit hot sectors and stocks as soon as a trend appears to be playing out…even when the fundamentals are still decent. Just look at what’s been happening to some of the market’s most popular work-from-home and shelter-in-place stocks lately.
Stocks of such pandemic darlings as zoom (ZM), Year (YEAR) and Teladoc (TDOC) have all fallen off 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 a similar fate.
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