What happened

The latest Federal Reserve rate hike and Fed Chair Jerome Powell's vow to do whatever is necessary to fight inflation are rippling through markets, sending shares down due to investor fears that the Fed's actions will push the economy into a recession. Sectors that are deemed more discretionary, and therefore easier for consumers to pull back from should times get tough, are getting hit harder than most.

Travel is perhaps the ultimate big-ticket discretionary purchase, and airline stocks are tumbling as part of the broader sell-off. Shares of JetBlue Airways (JBLU -0.15%), American Airlines Group (AAL -0.13%), and United Airlines Holdings (UAL -1.43%) are all down as much as 5%, with shares of Delta Air Lines (DAL -0.26%), Alaska Air Group (ALK -1.04%), and Southwest Airlines (LUV -0.91%) all down 3% or more.

So what

Airline investors have had plenty to worry about over the last two years. The pandemic brought the industry to a near halt, and efforts to bounce back in 2022 have been hindered by higher-than-expected fuel and labor costs and a shortage of qualified flight crews.

The health of the economy is just the latest twist in this ongoing saga. The airline industry took on a lot of debt to try to weather COVID-19, and analysts had hoped that as demand rebounds companies could repair their balance sheets and normalize operations.

Instead, a slowdown in China and war in Europe are putting a lid on demand for travel to those regions. And the Fed's actions threaten to slow the U.S. economy, which could eat into demand for both leisure and corporate travel.

All signs indicate that so far demand has not fallen off a cliff, with United earlier this month boosting third-quarter guidance thanks to continued strong ticket sales. It is clearly premature to say for sure what will happen to flight demand in the months to come, but Wall Street hates uncertainty.

The airlines, for their part, are doing what they can to move past the pandemic and normalize operations. On Wednesday, United said it was working to resume service to Cuba after suspending flights to the island in March 2020 due to the pandemic.

Now what

With the recent sell-off, airlines including American and JetBlue are trading at levels similar to where the stocks where in the spring of 2020. By almost any measure, that appears to be an overreaction. Although we don't know what the future will hold for the economy and what that might mean for airline stocks, the current situation is clearly a lot better than the existential threat airlines faced at the height of the pandemic.

But even if the stocks appear oversold, there isn't a clear catalyst on the horizon that would provide a lift. With Powell and the Fed committed to do whatever it takes to curb inflation, the market is expecting additional interest rate hikes up ahead that could eventually weaken travel demand, even if United and other carriers aren't seeing the impact yet.

And even in a best-case scenario, where there is no impact on demand due to the rate hikes, the airlines are likely to need at least another year to fully recover due to the headwinds they faced even before inflation became the central concern.

For those with a long time horizon and a willingness to ride out continued turbulence up ahead, Delta, Southwest, and Alaska are three top operators that are safer bets in a downturn and are likely to recover ahead of many of their rivals. But even those top operators can do little to fight the Fed or escape the macro conditions that have investors on edge.

Given the uncertain outlook, and the odds against a quick recovery, there isn't a compelling reason to rush into airline stocks right now.