There seem to be 2 paths for the market and economy: either the Fed successfully navigates this challenging set of circumstances and manages to achieve a soft landing, or the economy falls into a brutal recession that nullifies the inflation issue but creates a bigger problem in its stead.
So far, there are good arguments on both sides, and we are seeing the push and pull on both sides. Positive data, such as last week's beat in terms of the November jobs number and wage data, is bearish as it implies the Fed will need to hike more and keep rates elevated for longer. But, if the downward trend in inflation can continue, then the odds of a soft landing increase.
This circumstance would be positive for the stock market as it would lead to earnings being flat, while most are expecting a decline in 2023. And within the stock market, the travel sector would likely be one of the leaders on the upside.
This is because while there have been some signs that consumer spending is slowing in certain categories, there are no signs of slowing when it comes to spending on travel, services, and experiences. In fact, the pent-up demand from the pandemic remains strong.
This is evident from a quick look at the recent earnings reports of airlines and hotels which are seeing strength in future bookings, seeing capacity nearly filled, and customers are absorbing higher prices. Even the cruise companies which have struggled due to massive debt loads saw record sales during Black Friday.
Yet, these strong fundamentals are not reflected in share prices. For example, the Invesco Dynamic Leisure and Entertainment ETF (NYSE: PEJ) is off by more than 30% from its highs even after a 10%+ rally off the mid-October lows. The sector has offered some nice rallies through the year, but the underlying trend remains down as recession fears overwhelm the strong, near-term fundamentals.
In essence, the market believes that travel spending will deteriorate as the outlook worsens. And, historically this has been the case. But, it's fair to speculate that this time could be different given the unique developments of the past couple of years.