What happened
Stocks saw a light at the end of the tunnel over the weekend -- and today, they're racing to catch it. As of 1 p.m. EDT, the S&P 500, Dow, and Nasdaq stock indices are all up well over 5%.
And some of the stocks notching the biggest gains are in the beleaguered aerospace and defense sector: General Electric (GE +6.68%), TransDigm Group (TDG +3.53%), and Boeing (BA +2.58%) -- up 6.1%, 7.8%, and 10.6%, respectively.
Why?
Image source: Boeing.
So what
First, the macroeconomic news. Positive news began filtering out of Europe over the weekend, with the media reporting that the "fatality rate" from COVID-19 seems to have begun slowing, at least in Italy and Spain.
Here in the U.S., we have been told that the worst still lies ahead of us, and that the death toll this week could be grim. That being said, Vice President Pence mentioned "glimmers of progress" in slowing the spread of the novel coronavirus, and President Trump said a "light at the end of the tunnel" could emerge if the health crisis crests this week, and begins to subside thereafter.
This has raised hopes among investors that the end of this crisis, even if it's not near, is at least visible. In anticipation of a day when things get back to normal, therefore, they're placing bets that the airline industry -- which has been all but shut down as travelers shelter in place and social-distance themselves -- will eventually revive. Travel will resume at some point, and when that happens, airlines will need to resume buying airplanes (Boeing), airplane parts (TransDigm), and airplane engines (GE).
Now what
The trick will be figuring out how long this will take to happen -- and how patient investors will remain while awaiting a revival.
In that regard, it's worth pointing out that TransDigm -- one of the three aerospace stocks surging today -- announced only four days ago that it's laying off 15% of its workers and furloughing even more. Another -- Boeing -- announced Sunday that it is extending its suspension of production at its Puget Sound and Moses Lake facilities, to help slow the spread of COVID-19 among its workforce.
And General Electric? On Thursday, GE said it would have to furlough half its engine manufacturing staff "due to the unprecedented impact of COVID-19 on the commercial aviation industry."
Do these sound like the kinds of actions companies would be taking if they expected a quick bounce back from the pandemic, and the recession it has caused? Not to me, they don't. While I'm all for optimism and a stiff upper lip in the face of adversity, I worry that investors rushing to buy aerospace stocks today may be jumping the gun.
