The Inevitability of Another Travel Sector Downturn

It’s been a grim few months for the travel sector, but this week is showing that there is still a chance of bringing beleaguered businesses in from the cold

When I look on Twitter (NYSE: TWTR) lately, the internet seems to be divided into two camps: There are those who seem to be out and about, trying to get back to some semblance of normalcy, and generally, they are observing social distancing rules (though not always). Then there is the other camp that likes to take pictures of these people, regardless of whether they’re breaking these rules or not, and complain about them on social media, oblivious to the fact that they too are outside, engaging in social activity. 

Conclusion? People are going outside again, and investors are loving it, as recent studies are showing that consumer confidence is rising steadily. 

The stock market reacted in kind, as the Dow Jones (NYSEARCA: DIA) surged 2.2% on Tuesday, while the S&P 500 (NYSEARCA: VOO) rallied 1.2%. But just as many travel and airline stocks soared, many at-home stocks fell, which caused the tech-heavy Nasdaq Composite (NYSEARCA: SPY) to rise just 0.2%. 

Should investors be piling into the travel sector and selling at-home stocks, or is this just leading to yet another travel sector collapse? 

The fall (and rise) of travel stocks

I am not going to complain about the seemingly miraculous recovery travel stocks are making this week, but I will take it with a pinch of salt. First off, you don’t need to be a soothsayer to know that the airline industry is in big trouble, regardless of travel bans being lifted in the coming months. Despite that, Delta (NYSE: DAL), United (NASDAQ: UAL), Southwest (NYSE: LUV), and the rest all soared on Tuesday. Even if every airport in the world were to reopen tomorrow, it is unlikely that things will simply go back to normal. In fact, even Berkshire Hathaway (NYSE: BRK.B) CEO Warren Buffett, widely regarded as the greatest investor ever, dumped his airline holdings last month as he believed the industry was irreparably changed by the coronavirus.

The same goes for cruise line stocks which have already begun to recover, despite openly stating that their cruises for the foreseeable future will be at a limited capacity. Carnival Cruises (NYSE: CCL) was up 13% on Tuesday, while Royal Caribbean (NYSE: RCL) sailed 15%. 

Then there are travel companies such as (NASDAQ: TCOM), which rose 9.4% yesterday, and TripAdvisor (NASDAQ: TRIP), which has leaped 16%. It seems that bullish investors have forgotten the fact that there is no vaccine yet, the World Travel and Tourism Council still projects a total global loss of 75 million jobs and $2.1 trillion in revenue, and a recent Forbes poll shows that two-thirds of American’s will not travel for at least 3 months after the virus subsides. 

So when the optimism subsides and the reality of the travel industry’s predicament sets back in, we are in for one hell of a downturn in the travel industry. After all, just this week Hertz (NYSE: HTZ) car-rental filed for chapter 11 bankruptcy, and who is to say some more tourist-dependent businesses won’t follow?

It’s not just hurting the travel sector

Ok, so travel stocks have probably earned some respite after all they’ve been through, but the driving force behind 2020’s stock market shouldn’t suffer as a result? I am of course talking about the at-home stocks, which are dipping this week due to the easing of lockdown restrictions. 

Shares of Netflix (NASDAQ: NFLX), Shopify (NYSE: SHOP), Peloton (NASDAQ: PTON) and Zoom (NASDAQ: ZM), all companies that benefited from consumers sheltering in place across the country, closed lower Tuesday. The idea that society may be reopening sooner rather than later could mean that consumers will return to some of their old habits, spending less time at home. However, investors seem to be ignoring the fact that many of these at-home businesses will likely become the ‘new normal’ once the lockdown has ended and the coronavirus no longer dictates our lives. There has been much discussion of this lately, with Facebook (NASDAQ: FB) all-but confirming last week that business has changed forever

At the end of the day, it is still far too early for investors to make wild assumptions concerning the coronavirus, as we have no idea how far-reaching the effects will be, nor can we rule out the possibility of a second wave of infections, especially come winter and the effects that will have on the economy. 

For now, all investors can do invest smart, invest long-term, and wash their hands.

MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.