For much of 2022, there has been a debate raging on Wall Street about whether or not travel stocks were a buy. There was some strong and compelling evidence on the bullish side including expectations of massive pent-up demand given that so much of the sector had been depressed since early 2020.

Further, people's household finances were in good order, and all the indications from airlines and booking companies signalled strong demand or record demand in some instances. Travel stocks were attractively valued despite expectations of a near-term earnings bump.

On the bearish side, travel stocks were lumped in with all other sorts of consumer discretionary stocks and have weakened as recession risk rises. Essentially, the market doesn't see anything structurally changing in terms of the travel sector and is treating its near-term earnings bump as being transitory.

As recession risk increases, spending in all categories will decline. An additional headwind for many travel stocks, specifically cruises and airlines, are rising rates and high oil prices. These companies took on large amounts of debt to survive during the pandemic. Hotel stocks are also large owners of real estate which have also suffered from higher rates, chilling activity, and slower growth, leading to declines in asset prices.

This mix of bullish and bearish factors is effectively reflected in the chart of the Invesco Dynamic and Leisure ETF (PEJ  ) which is an effective proxy for the travel sector. For the first 3 months of the year, it was essentially flat YTD even while the S&P 500 (SPY  ) was down double-digits.

Now, as recession risk has been sharply increasing, PEJ has been plummeting and has dropped about 30% over the last 3 months, wiping out any shred of outperformance.

PEJ's performance is another indication of the market's duality. The stock market seems to be convinced that a recession is imminent and continues to treat inflation as transitory. In contrast, the bond market continues to focus on inflation and the hawkish Fed as rates continue trading near their highs. It's also not a coincidence that the weakest parts of the travel segment have been companies with high amounts of debt like airlines and cruises.