Why Travel and Hospitality Stocks Surged on Monday

What happened?

Stocks surged sharply higher on Monday, with the major indices up more than 7% at the end of the trading day. Despite a weekend that showed a still-rising number of cases of COVID-19 around the world, and the U.S. in particular heading for what could be a brutal and deadly peak, there was also reason for optimism. In some of the hardest-hit countries, there were signs that the worst phase of the pandemic's growth might be over, and that the numbers of new daily COVID-19 diagnoses, and deaths from the disease, are about to start falling. 

As a result of this glimmer of hope, investors charged headlong into the market Monday. Hotel, travel, and hospitality stocks were some of the biggest gainers, including the five below. 

Source: Yahoo! Finance. 

So what

Monday's huge gains were a big sign of optimism that the worst could be behind us soon. After multiple weeks during which the number of newly diagnosed COVID-19 cases shot higher on a daily basis, authorities in Spain and Italy expect that daily diagnoses in those countries will start to fall in the days ahead, and that the daily death tolls are also set to plateau and fall. 

Image source: Getty Images.

There's also hints of a plateau in New York, where Gov. Andrew Cuomo said that the number of daily deaths has been "effectively flat" for the past two days. The deadly illness has hit New York harder than any other state, but there could be some light at the end of what has been a dark, deadly tunnel. Cuomo also said that the number of COVID-19 hospitalizations is also starting to fall, as is the number of people being admitted to hospital ICUs. 

Add it all up, and investors are feeling hopeful that the restrictions aimed to help curb the spread of novel coronavirus are working, and that we are moving closer to a return to normalcy. 

It's wonderful seeing some indication that the terrible toll of COVID-19 could be starting to lessen, but the trajectory for the U.S. in particular still suggests that the worst is ahead of us.

Each day, the number of new cases being diagnosed is higher than it was the day before, and the death toll is expected to increase sharply over the next two weeks. 

As the number of U.S. COVID-19 fatalities rises, Monday's burst of optimism could quickly fade, particularly as the full economic impact of the actions that have been taken to stem the coronavirus's spread becomes clear. We are still early in this recession -- the economic data showing we are even in recession isn't available yet -- and the first dollars of federal stimulus haven't even hit people's bank accounts. 

Now what

That should not be taken as a warning to not buy any of the stocks mentioned above. It's just a reminder that we are still very, very early in this crisis. There are still no proven medical treatments for this dangerous and highly contagious pathogen, and in the best case, we are over a year from having a proven SARS-CoV-2 vaccine. Without either of those weapons in our arsenal, it's hard to see the economy -- particularly travel and resorts -- being opened up in a large way in the near future. 

That's why, for example, Vail Resorts has suspended its dividend, started furloughing its staff, and drawn more than $500 million from its credit line. That's why Marriott has reduced staff, furloughed even more, and drawn a massive $2.5 billion from its credit line. That's why Expedia drew $1.9 billion from its credit line. 

Despite Monday's optimism, we are still likely months away from the day any hotel chain or resort reopens on a large-scale basis, and air travel is likely to remain massively below prior levels for at least the remainder of 2020. 

So as much as Monday's big gains might feel nice, investors should take a muted, and balanced approach right now. The recession we're already in will likely prove one of the deepest in history, and even with massive government aid, it will take time to climb out of it even after it's safe to restart the economic activities that have been paused.

Speaking of which, that's still the biggest unknown. Even if the numbers of new COVID-19 cases and deaths plateaus and begins to ebb in the near future, we can't just go back to business as usual, or we will put millions of people at risk. So be prepared for a downturn that could last longer than the optimists expect, and a recovery that might not arrive as quickly as we hope. 

Eventually, the hospitality industry will return to normal, and I expect all five of these companies to survive. I also expect that today's prices will look like bargains in the future, but given that they will have little in the way of revenue or cash flow for the foreseeable future, the months ahead are going to prove brutal. Invest accordingly.