What happened
Stocks rocketed higher on Thursday following a government report that showed inflation eased last month, leading investors to hope the Federal Reserve might be able to slow rate hikes sooner rather than later. Airlines, a sector that historically has suffered during an economic slowdown, outperformed the broader averages.
Shares of JetBlue Airways (JBLU -3.12%) traded up as much as 9%, while shares of American Airlines Group (AAL -2.18%), Delta Air Lines (DAL -2.62%), United Airlines Holdings (UAL -2.52%), Southwest Airlines (LUV -0.54%) and Alaska Air Group (ALK -1.89%) were all up 4% or more as well.
So what
Airlines historically have been cyclical businesses, performing well when times are good, and poorly when the economy goes south. It's hard to afford plane tickets when consumers are struggling to pay the bills and businesses are seeing sales decline.
The industry has held up surprisingly well this year as the Federal Reserve has used higher rates to try to slow the economy. But the fear of more aggressive Fed moves, and the potential for a recession if it goes too far, weigh heavily on the minds of airline investors. With that in mind, the October Consumer Price Index (CPI) data, released before markets opened on Thursday, was welcome news for the industry.
The CPI for October showed prices up 7.7% year over year and up 0.4% from September, short of economist expectations for jumps of 7.9% and 0.5%, respectively. The data suggest that while inflationary pressures remain, there is at least some sign of cooling increases.
That matters because investors are focused on what further Fed aggressiveness might do to slow the economy. So any indication that the Fed might not have to be as aggressive in the future is a relief.
JetBlue shares are particularly strong because arguably that airline, more than any other, needs a robust demand environment heading into 2023. The carrier is trying to acquire Spirit Airlines in a deal that is predicated on growth and strong demand up ahead, and it could be dangerous to try to acquire and integrate the discount airline in the middle of a recession.
Now what
This is just one data point in a long series of economic data, and the overall market reaction appears to overstate the relevance. Even if inflation is cooling slightly, the Fed would appear to have significant work to do from here, and the nation's top bankers have insisted they will not reverse course at the first sign of slowing.
For airline investors, there should be some solace in how well the companies performed in the third quarter and what carriers said about demand heading into the key holiday season. For all of the talk of higher rates and clear slowdowns in areas like housing, employment remains strong and consumers still have money to spend. Coming off the pandemic, there is clear pent-up demand for travel that so far has outweighed whatever economic risks are on the horizon.
That could all change quickly, and investors need to remain on guard. Even in the best-case scenario, the industry is going to need time to fully recover from the pandemic, and some amount of patience will be needed. But the economic signs, both macro and company-specific, are trending in the right direction, and investors are rallying into the shares as a result.
