The Stock Market's October Surprise Could Be Positive

Wall Street did an about-face on Friday, powering higher amid renewed hope that an end to the COVID-19 pandemic might be in sight before too long. After a horrible September, the Dow Jones Industrial Average (^DJI -0.11%), S&P 500 (^GSPC 0.02%), and Nasdaq Composite (^IXIC 0.10%) all bounced back to deliver solid gains.

Data source: Yahoo! Finance.

One particularly challenging industry for investors over the past year and a half has been travel and tourism. The pandemic led to a near-standstill in travel activity, and many weaker players have been in a struggle for survival ever since.

Now, though, many companies in the space are seeing pent-up demand among travelers finally result in improving fundamentals. Positive news on the COVID-19 front helped push travel stocks higher on Friday, and it could be the beginning of a longer-term trend for the beaten-down sector.

Big gains across travel

Pick an area of the travel industry, and odds are good that you could find gains there. Cruise-ship stocks have desperately waited for a return to normal operating conditions, and investors were optimistic about their future today. Norwegian Cruise Line Holdings (NCLH -0.77%) led with a 6% rise, with Carnival (CCL 1.49%) and Royal Caribbean (RCL 0.04%) rising 4%.

Hotel stocks also posted gains. Hilton (HLT 3.89%) was up almost 5%, while Hyatt (H 1.35%) saw an even steeper 6% gain. That translated into big gains for the hotel-concentrated online travel websites as well, with Booking Holdings (BKNG -0.47%), Expedia Group (EXPE 0.58%), and Airbnb (ABNB 1.17%) all gaining 3% to 4% on the day.

Once-empty airports like this are filling up again. Image source: Getty Images.

Airlines got even bigger gains. Southwest Airlines (LUV -0.54%) got an upgrade, and that helped push its stock up 6%. United Airlines Holdings (UAL -2.52%) and Delta Air Lines (DAL -2.62%) fared even better with rises of 8% and 7% respectively. A prominent industry analyst upgraded shares of Southwest from neutral to overweight and increased its price target on the airline by $6 to $70 per share.

Industry data are suggesting that travel spending has already risen substantially, and planned easing of border restrictions could invite a flood of foreign tourists into the U.S. to boost travel prospects even further.

Is it too soon?

Some naysayers are warning that the confidence in travel stocks could be misplaced. Many companies still don't even have workers back in the office yet, let alone ready to jet off to faraway lands to do business. Advances in remote communications technology won't eliminate travel entirely, but they could reduce the extent to which it bounces back even after the negative effects of the pandemic have eased up.

Yet if summer travel has bounced back, it could create big jumps during earnings season. That could build even more positive momentum for the industry.

In the end, whether it happens immediately or after an extended period of time, it's likely that travel activity will return to pre-pandemic levels. To the extent that travel stocks are still priced for the risk of ultimate failure, they might well represent good value even after their gains. For those that have jumped above even their pre-pandemic stock prices, however, one has to question whether the rally has gotten ahead of itself.