Many thought that after vaccines became available that the worst of the coronavirus would be behind us. Reality hasn't been so simple. Instead, some portions of the population seem unwilling to get vaccinated, while others don't feel the urgency.
Effects of Delta Variant
All the while, the coronavirus has mutated into the "Delta variant" which seems less lethal but more contagious. As a result, the recent wave has exceeded all previous waves in terms of infections, although deaths and hospitalizations have been lagging. In terms of the economy, the recent spike higher in cases has had dampening effects on parts of the economy like travel, eating out, and overall consumer spending.
We can also see the different iterations of the coronavirus and their spread through the travel stocks. They essentially bottomed in the middle of last year but kept underperforming till November when the positive results from the Pfizer
Most 'reopening' stocks peaked in between February and May and have gradually trended lower since then. In addition to the recent rise in cases, this has been attributed to expectations that consumer spending could dip next year due to the expiration of stimulus and some healthy profit-taking given the massive gains between November 2020 and February 2021.
While travel stocks have been quite volatile, the overall market has continued to trend higher as rates remain low, and earnings continue to increase with many analysts projecting 2022 EPS to come in around $210+. However, there are some reasons to consider buying the dip in travel stocks:
1. Coronavirus Cases Maybe Peaking
The recent wave has eclipsed the previous wave from the winter in terms of active cases, however, there are signs that its momentum is ebbing as the 7-day moving average is now declining. This notion is also supported by countries that dealt with the delta variant which showed that the virus peaked after about 2 months. Additionally, the Delta variant has also led to people curbing their activities, increased mask-wearing, and also an increase in the vaccination rate which bodes well for the future.
2. Travel Pent-Up Demand Likely to be Strong
Despite concerns of falling consumer spending, the overall economy and labor market are in great shape in addition to secondary measures like household savings, leverage, and asset prices like the stock market and housing. If the virus does start to recede and vaccinations keep inching closer to the 75% 'herd immunity' level, then it seems likely that travel demand jumps higher as it did in the summer prior to the 'delta variant' emerging.
In terms of trading, many travel stocks are offering a low-risk opportunity in terms of a higher low. For example, the airline ETF - U.S. Global Jets