Over the last couple of months, a major disconnect has formed in the travel sector between the data and stock prices. We are seeing travel volumes above pre-coronavirus levels.
Specifically, leisure and regional travel are well-above these levels, while international and business travel are rapidly improving as well. Currently, they are on pace to exceed pre-coronavirus levels by the beginning of next year.
There's a similar message from corporate earnings calls as airlines reported strong bookings through the rest of the year which is leading to more pricing power. There is also some relief in terms of energy prices falling by more than 10% over the last month, and companies reporting that they are 95% through the process of increasing capacity with labor being the major bottleneck.
However, the stock prices don't believe the message. The U.S. Global Jets ETF
Cruise Stocks
In any correction, the most vulnerable stocks and sectors see the most damage. And, this is certainly the case with cruise stocks as they are down by more than 50% over the same timeframe. And, they are down by more than 70% since their peak last year.
Cruise companies are offshore entities due to better legal protections and tax advantages. In most circumstances, this is an advantage as it allows them to skirt labor laws and other U.S.-based rules and regulations.
However, it was a liability during the pandemic as they were unable to benefit from government bailouts. Instead, they were forced to tap public markets to raise money to get through the pandemic. The cost was high-interest debt and a major dilution in shares which is now undermining their recovery, especially in a high-rate environment, where analysts are forecasting a drop in earnings due to a recession.
Such developments obviously increase bankruptcy risk. Additionally, with macroeconomic headwinds, investors can no longer feel confident that these companies are on an upward trajectory in terms of revenue growth.
