By now, you’ve heard the bad news: the yield curve has just reversed again, raising fears of an impending recession. U.S. inflation hit a 41-year high in May, and investors now fear that the Federal Open Market Committee may raise its federal funds benchmark rate by as much as 0.75 percentage points after its meeting this week as it continues its efforts to lower inflation.
The stock market crashed in response to Dow Jones industrial index down 2% as of 12:30 pm ET, and S&P500 a fall of 2.8%.
Travel and leisure stocks were hit particularly hard on Monday by an online travel agency. Booking Holdings (BKNG -5.27%) shares fell 6.9% and casino operators MGM Resorts International (MGM -9.01%) as well as Caesar Entertainment (COR -11.71%) decreased by 9.4% and 11.3% respectively.
Hotelier promotions Marriott International (BT -3.92%) – at the same time down – did not fall as much as the others, slipping only 4.4%.
What do higher interest rates, recession fears, and the yield curve have to do with travel and leisure stocks? Let’s break it down step by step.
As Yogi Berra said, “It’s hard to make predictions, especially about the future.” However, the inverted yield curve that occurs when short-term US Treasuries offer higher interest rates than long-term Treasuries is considered one of the best predictors of an impending recession. This is because you usually expect investors to demand higher interest rates on assets that will keep their money tied up for a longer period of time. When it doesn’t, it’s seen as a strong sign that investors believe the economy is about to contract.
This is bad news for travel and entertainment companies because if the economy doesn’t grow, consumers will have less money to spend and may be more inclined to sit on their money, if they have it, waiting. until something returns. back to normal.” The problem is that the longer consumers refrain from spending, the longer it may take to return to normal.
It is bad news. Now for the good: while the recession is likely to hurt the businesses of all the companies mentioned above, not all of them will be hit equally.
Marriott, in particular, was among three companies called in over the weekend. Barrons the article is both attractively priced (like a stock) and well positioned (like a business) to outperform it over the next few years. For example, it has reduced its long-term debt by $1.2 billion since the start of the pandemic (which will reduce the impact of higher interest rates on its bottom line) and cut its capital spending to the point where it now generates more free cash. more than before the pandemic.
If a recession comes, it will likely hit Marriott along with Caesars, MGM and Booking Holdings, of course. But Marriott’s bolstered balance sheet and improved cash generation should help it weather the storm, and once the economy emerges from recession, analysts…