The summer of 2021 is shaping up to look a lot different than one year ago. As millions of vaccines are distributed across the country, businesses are returning to near-normal capacities, and it doesn’t feel so strange to get out of the house.
In fact, more than two-thirds of Americans are planning for a season of sun and travel. For the transportation and hospitality industries, it’s great news after taking a hard hit during the pandemic. As the number of bookings continues to rise, stocks in the travel sector have seen a major boost.
But can investors get in on this trip, or have travel stocks already taken off?
The State of Travel Stocks
Investors’ confidence in life heading back to pre-pandemic norms has made the travel industry one of the hottest investing sectors this year. While the S&P 500 Index has gained about 13% in 2021, airlines are already up 25% and S&P 500 cruise lines and hotel companies are up 18%. From January to May, the Dow Jones Transportation Average, an index of airlines and railroads, rose for 14 straight weeks, the longest streak on record.
This major recovery can largely be attributed to Americans’ increased comfort toward getting back on airplanes and jetting off, combined with the travel sector’s usual seasonal summertime growth. Add potential leftover savings from stimulus checks (or unused 2020 travel funds), and a travel industry comeback may happen quicker than many expected.
Bounce back or bon voyage?
All signs point to a much healthier summer travel season than the last. But cruise, airline, hotel and other stocks in this sector can’t continue to rise forever. For investors who are hoping to make it big in this area of the market, the ship may have already sailed.
Why is that, when summer hasn’t even begun? Though people are expected to take up traveling and vacationing again, it likely won’t be nearly enough to make up for more than a year of loss, especially as the state of travel for a partially vaccinated population is still unclear. Airline capacities remain lower than normal and countries around the world continue to grapple with the pandemic and the resurgence of tourists.
At the same time, stocks in sectors related to the reopening of the economy (like entertainment, hospitality and travel) presented a big opportunity for retail investors in late 2020 and early 2021 as hope was still a fledgling feeling. As investors leaned into the industries that were barraged by the pandemic, travel stocks may have traveled too far beyond their fair values. Many airlines and cruise operators are still unprofitable, and earnings expectations for next year look bleak.
While investors look for the next big trend in the market, some may begin to pull out their investments in the travel and hospitality industries — which could cause stocks to quickly catch up with their earnings. All in all, it could take the travel sector a significant amount of time to make a full financial recovery, potentially leading some companies to declare bankruptcy or search for a buyer.
After a year of the fate of traveling (and the businesses that make it possible) up in air, it can feel reassuring to see this industry rally. But while many feel confident about jet setting once again, questions still remain about how exactly the industry will adapt to a post-pandemic world. Lingering uncertainty continues to leave travel stocks susceptible to a selloff as the sector works to recoup months of loss.
As an investor, this doesn’t mean you should avoid investing in travel-related securities at all costs. Instead, take a critical eye to companies you’re interested in. Rather than simply hope the industry’s ongoing recovery will lead to profits in your portfolio, review a company’s financials and earnings outlook to make a more informed decision whether it is a good stock pick for you. And remember, the more you diversify your portfolio, the stronger defense you’ll have against any one company or industry’s ups and downs. That diversification could come through a fund of travel stocks, or stocks in other industries.
The Bottom Line
Knowing when to invest in (or avoid) a certain sector can be tricky. What may seem like the perfect time to buy in could turn out to be a mistake. But investing is a practiced art, so leaning into it consistently could help build up your technique and instincts.
With vacation season around the corner and getaways on most everybody’s minds, the travel industry sounds like a perfect fit for a portfolio. But it’s critical to think through the big picture. If you want in on hotels, airlines, cruises and more, do your research and stay diversified so you can keep your portfolio balanced — and fund many safe travels to come. As usual, always factor your particular investment situation when making investment decisions.
Want to up your investing game? Learn from Ally Invest experts and other financial pros at the Becoming a Better Investor Digital Conference on June 23. We’ll discuss top market trends and finance strategies to add to your arsenal. And the best part: It’s totally free and 100% virtual.
During her tenure as president of Ally Invest, Lule led Ally Invest Securities, Ally Invest Advisors and API business lines. She also authored several articles about the investing industry and investor behaviors. Lule has a passion for agile product development and an appreciation of design thinking in shaping user-centric experiences. An advocate for financial and retirement solutions that rely on a mix of digital and human guidance, Lule believes in empowering individuals, especially women and minorities, to independently drive their own financial futures.