What happened
Travel and entertainment stocks that had been on the road to recovery in 2021 are facing pressure now as the market worries more about the impact the omicron coronavirus variant will have on their businesses. Stocks are down across the board, but companies with consumer-facing and discretionary businesses are being hit the hardest.
Carnival (CCL 3.57%) was down by as much as 4.3% in trading on Monday and closed the session 2.3% lower. AMC Entertainment (AMC -0.88%) dropped 7.6% early, only to recover and close down by 0.9%. In the gambling industry, MGM Resorts (MGM 0.99%) fell by as much as 5.1% at one point, and ended the trading day off by 2%.
Image source: Getty Images.
So what
Omicron is the news of the day, but it's not lockdowns that the market is worried about. Even in the states currently taking the most intense COVID-19 measures (relatively speaking), widespread lockdowns are not on government agendas, as officials are largely leaving businesses and individuals to make their own health and safety choices.
That may not be good for companies like Carnival, AMC, and MGM, though, because they will feel the impact of people's choices as this wave of the health crisis intensifies.
Labor shortages are rippling across the economy as millions of people are getting sick with omicron each week, reducing the availability of products and services. On the demand side, we could see a long-lasting impact. Customers may ask for refunds for upcoming trips or tickets, and demand for travel and out-of-the-home entertainment options may sag in the coming months. Spending in the consumer discretionary arena has jumped during the last six months, but it may be in for a winter lull.
Since June 1, 2020, all three of these stocks recovered back from their early pandemic lows as investors bid them up in hopes that demand for their offerings would return. The steep omicron surge may throw a wrench into those recovery narratives.
Now what
Omicron is now the dominant strain of COVID-19 worldwide, but there is reason to hope that its virulence and rapid spread could mean that this latest surge will be relatively brief. In South Africa, where omicron was first identified, the coronavirus variant spread quickly, with daily new diagnoses peaking well above that nation's previous worst levels, but those numbers are now in a similarly sharp decline. In the U.S., new daily cases are still rising, but if the pattern displayed in South Africa is repeated here, new COVID-19 cases could start to fall domestically within a month.
Consumer discretionary stocks will likely feel a short-term impact, but they may recover relatively quickly, and I think that recognition of that is one reason why the sell-off hasn't been worse. Investors have seen that demand comes back quickly once consumers feel comfortable with traveling and consuming entertainment products, and that may happen again.
What I'll be watching in 2022 is not only demand but the pricing power these companies have. If inflation does persist in the U.S., these are companies that may benefit because they'll be able to raise prices and generate more revenue per customer. When you consider that cruise ship, casino, and movie theater companies made their key investments in infrastructure years (and sometimes decades) ago, you can see why any increases in prices should flow disproportionately to their bottom lines. That's why I'm not selling my consumer discretionary stocks, despite the latest spate of bad news.
