What happened

The "Santa Clause Rally" was zapped by the Grinch on Thursday, with the Dow Jones Industrial Average down more than 700 points on fresh data that has investors worried about the quarters ahead. Air travel, which so far has largely flown above the growing economic malaise, was hit harder than the broader markets on concerns that if the economy weakens, demand is bound to fall.

Shares of Boeing (BA -1.85%) fell as much as 5.3% on Thursday, while shares of United Airlines Holdings (UAL 0.91%) were down 4.7%, and engine-maker General Electric (GE 0.28%) lost 3.3%.

So what

The airline sector has done remarkably well this year, considering the circumstances. Typically, in times of economic distress, airfare is an expense that leisure and corporate customers defer, leading to a falloff in demand. But two years of limited travel due to the pandemic created an upswell in pent-up demand, which has held up well so far and should be able to keep things going. 

Of course, there is no guarantee that those gains can continue if the economy continues to falter. On Thursday, stocks plunged after relatively good economic data indicated a strong labor market and faster-than-expected economic growth. The theory among investors is that such numbers will force the Federal Reserve's hand in fighting inflation, leading to higher interest rates designed to slow the economy, which could throw us into a recession.

United has been one of the loudest voices expressing confidence about 2023, and its business-focused route network arguably is the most vulnerable to a corporate pullback. Boeing, meanwhile, saw its total debt balloon by about 400% during the pandemic and desperately needs robust commercial deliveries in the years ahead to generate cash flow and repair its balance sheet. A pullback in demand would likely make airlines more defensive and could lead to the deferral of new plane deliveries, which would stall Boeing's turnaround.

General Electric was in the middle of a turnaround long before the pandemic had hit, but CEO Larry Culp's plan in 2020 was to use the relatively strong aviation unit, including its powerful engine business, to fund restructuring in GE energy and elsewhere. The pandemic put those plans on hold, and GE, like Boeing, would find its efforts to reboot itself complicated by a slowdown in commercial aviation.

Now what

Days like Thursday are a reminder of how often the markets boomerang with each new data point and why it is so important not to get too bullish, or too bearish, based on any one headline. The truth is the aviation industry, and companies like Boeing and GE that rely on it for revenue, is on the upswing post-pandemic. It is also correct that it will take time for business to fully recover, and there are a lot of potential pitfalls along the way.

We don't yet know what the economy will do in 2023, or what it will mean for travel demand. Given the uncertainty, expect a lot of volatility in the stocks in the months to come. For long-term focused investors willing to look past the near-term turbulence, stocks like United, Boeing, and General Electric appear to be on the right course and should gain over time. But the time frame is more likely to be years than months, and given the challenges these businesses face, it is likely other sectors of the economy will recover before aviation.

These stocks, even with the upside, are not for the weak of heart right now. For those interested in buying in and waiting out the volatility, it is advisable to keep your seatbelt fastened and prepare for turbulence up ahead.