There wasn’t much in the way of company-specific news today, but virtually all economically sensitive stocks, like airlines, were surging higher today after recession fears had caused a big sell-off over the past week. But there may be more to this than just an oversold bounce, as some macroeconomic data showed inflation expectations may not be as bad as feared.
Ever since the market got June inflation data, as well as results of the preliminary University of Michigan consumer-sentiment readings earlier this month, the market has taken another leg down. That’s because the official Consumer Price Index (CPI) report showed higher-than-expected core inflation, and the University of Michigan survey showed inflation expectations over the next five years ticking up, possibly becoming “un-tethered” to the long-run targets set by the Federal Reserve.
This caused investors to panic that inflation was becoming more entrenched, which would mean the Federal Reserve might have to hike interest rates faster and cause a bigger slowdown or recession to get things under control. Recessions are never good for stocks like airlines, which depend on having capacity as full as possible in order to be profitable.
However, the Michigan consumer survey was just a preliminary report, and the final version came out today, showing long-run expectations of inflation at just 3.1%, down from the 3.3% reading in the preliminary results. Expectations for inflation for the upcoming year ahead was also revised down to 5.3% from the initial reading of 5.4%.
After markets sold off so much based on the preliminary survey earlier this month, the cyclical stocks that sold off especially hard rallied harder in response today, including airlines. Earlier this week, Citi analyst Stephen Trent published a note saying the sell-off in airlines had gone too far, reflecting fears over a 2008-to-2009-type financial downturn. Trent made the point that airline capacity is still below that of 2019, adding that airlines have more pricing power as people still wish to travel. While oil and labor issues are a concern, they could be relieved from current levels going forward.
On that note, the union representing United Airlines pilots approved a new contract negotiation today, settling on a 14% pay raise. There may also be some additional relief for United since this issue is now behind the company. Still, it was likely that macroeconomic data fueled today’s rise, given the broad-based increases in airlines and cyclicals more broadly.
I’m not the biggest fan of airline stocks as investments. In terms of cyclical stocks, both banks and semiconductor manufacturers seem more attractive since they have less debt, and banks may actually benefit from higher rates, while semiconductors seem set to grow over the long term due to increased automation and digitization. Remember, while airlines look quite cheap on a price-to-earnings (P/E) basis, they still have to work down the significant debt they took on during the pandemic. That will take a few years even if operating results remain robust.
That being said, there is a price at which even unattractive businesses like airlines become attractive. So, if you think the airlines have become cheap enough, they could be attractive trades as long as we don’t have another 2008-like downturn or another global pandemic.