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Tuesday, February 23, 2021
Airline, cruise stocks surge to start the week.
Investors can't keep up with economic optimism right now.
On Monday, the re-opening trade was on fire with shares of airlines, cruise lines, and banks all rallying. And this while Wall Street strategists continued raising full-year GDP forecasts as others reiterated calls that consensus estimates are still too conservative.
Which continues to show that for all of the optimism about 2021 that was anticipated by investors last year, folks are still playing catchup.
Travel stocks were the stars of the market show on Monday, with positive earnings commentary from Royal Caribbean (RCL) and an industry-wide upgrade of the airlines from Deutsche Bank analyst Michael Linenberg catalyzing the moves.
Royal Caribbean said pricing for its bookings for the second half of this year are trending higher than 2019, adding that 75% of bookings for 2021 are new reservations. Shares of Royal Caribbean gained 9.5%, while peers Carnival Cruise (CCL) and Norwegian Cruise Lines (NCLH) also rallied more than 5.5%.
"We are upgrading our investment stance on the sector as COVID cases, hospitalizations, and vaccination rates are all trending in the right direction," Linenberg said. "We are also encouraged by the industry’s nonstop pursuit of numerous initiatives to mitigate the spread of COVID and increase the confidence of the flying public... Airlines that failed to participate meaningfully in past recoveries were typically 'broken' business models, had insufficient liquidity, and/or [were] unable to service their financial obligations. We are of the opinion that none of the publicly-traded airlines in our coverage universe fall into those categories."
Hotels and online travel agency stocks also rallied on Monday. Other re-opening plays like Financials (XLF), Materials (XLB), and Industrials (XLI) were also all higher on Monday amid an interesting day for markets that saw the tech-heavy Nasdaq fall nearly 2.5%.
Improving COVID data, an industry ready to exert operating leverage, and pent-up consumer demand are all dynamics we've covered here in the Morning Brief over the last several months. And yet it seems investors may still not be fully appreciating that risks remain to the upside in this market and economic moment.
The economics team at Jefferies on Monday became the latest Wall Street firm to raise its GDP forecasts, calling for 2021 GDP growth of 6.9%, up from a prior forecast of 6.4%. The firm also expects 2022 growth will remain robust at 5.2%. A higher likelihood of additional fiscal support drove this latest upgrade.
Even this upgrade, however, might not be enough to match an eventual reality for the economy.
Neil Dutta, an economist at Renaissance Macro, said Monday that 8%-10% GDP growth this year "does not feel like a big leap." It's only an unwillingness from many economists to meaningfully stand out from their peers that in Dutta's view keeps consensus estimates creeping higher but remaining too conservative still.
"We all know that the second half of this year will be better, but no one really knows how strong the back-half of 2021 can be," Dutta writes, adding that, "the distribution of risks largely skew one way, upward. Who wants to be the one to pencil in growth numbers no one has seen in their careers? Not many are willing to make that leap."
Dutta, a 2005 graduate of NYU, adds that, "The last time we saw the consensus even contemplating numbers like I’m talking about, I was in diapers."
Dutta is not alone there, at least. Though perhaps it is a youthful enthusiasm that separates his bullishness from the rest of the pack.
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