Travel Stocks: What Recession? Jarvis® Update June 30, 2023

Rumors of a recession continue to persist, but the travel statistics and travel stocks tell a totally different tale. We cover that story and much more on this week's Jarvis Update. I'm your host, Brian Dress, Director of Research, joined as always by our Chief Investment Officer and CEO, Nolan Langford. Nolan, welcome to the program.

Thank you. It's good to be here.

Well, no one— there's no sports to talk about, so I guess we're going to talk stocks. Oh, before we get started, we'd love to ask everyone who watches the videos on a weekly basis to please like and share them. It does help other investors find it. It really helps us. And subscribe and hit the bell for notifications. You'll find out each time we're out with a new video and we're out every other week with these. We also want to make this an interactive experience, so we'll ask you to comment in answering the question below. In the second half of 2023, which will have a better performance, the stock market or the bond market? Answer that question below. We'll get, get into a conversation with you below and we'll see how it goes. Let's get started with a quick preview. Markets were mixed this week. We've got two topics, as we usually do, to discuss about the week's activity and what we're seeing in markets over the last few months. First of all, we're going to answer the question, why do we pick stocks? And then the second, we're going to talk about travel stocks. Let's start with a few announcements. First of all, we do have a new-ish website. You can check us out at leftbrainwm.com and sign up for our newsletter, the Jarvis Newsletter. We were out last week with our newsletter, quite a few important topics we think would— you would be enriched to, to read. So go ahead and check that out. And of course, we produce this show for the everyday investor, whether you have an IRA or you have a 401(k), and if you manage your own money or you work with an advisor, we'd love to be a resource to you. If you'd like a second opinion on how to position yourself for the market recovery that we think is underway, we would love to talk. It's a call on the number below, and we're going to shout out to our audio listeners and give you that number. That's 630-547-3316. And we also do want to thank our audio listeners for being with us. Got quite a few podcast listeners. And if you're an institutional investor, we've got something for you as well. That's our research service. Our analyst team puts out 6 to 8 fresh stock and bond reports every month. That's the type of reports that we use to make investment decisions in-house. And we also have a library of, of hundreds of those reports that we've been putting together since 2020. We're going to have a little special for the viewers for the, for the July 4th holiday. If you sign up in the next week, we'll sign you up for $99 a month for the life of your subscription. So check that out. Send us a note. We'd love to get on a call and set you up with that. So the market recap. The markets were mixed this week. The broader market, S&P 500, that basically tracks the entire market, was up 0.3%. The tech-heavy Nasdaq was down 0.3%. And then the Russell 2000 that tracks the small-cap stocks in the market That was up 1.8%. That reverses what we've seen over the last few weeks. We've seen semiconductor stocks and AI stocks really dominate the conversation for most of 2023. But those are cooling off this week after some monster moves over the last few months and not much macro news to speak of this week, which is, which is what we like to hear. Nolan, you have any general impressions of the market action that we're seeing this week?

I think it's good. Markets are settling down. We're in the dog days of summer. The macroeconomic interest rates, Fed policy, all of those things are sort of going from the front page to the back page. So it's nice.

It is nice. Again, as I've said before, I'm sure Jerome Powell's family loves him, but we're tired of talking about him. Let's jump right into topic 1. So topic 1 is more of a general topic. The question is, why do we pick stocks? And the answer that we would say is compounding is a true monster. In last week's newsletter, we talked a little bit about compounding and why we pick stocks. One of the reasons is a statistic that we cited in the letter, uh, the difference between the average stock market return of 11.88% since 1957 and 15% return over time is enormous. I'm going to throw up a chart here that we put together last week that shows that, uh, over a 30-year period, if you start with $100,000 and you invest in the overall stock market or you invest in Securities that return you 15%, there's a huge difference in how much money you make over a 30-year period. At 15%, $100,000 will turn into almost $7 million over a 30-year period, which is pretty astounding when you stop and think about it. Nolan, can you explain to us why we call compounding the 8th wonder of the world?

[Speaker:NOLAN] This is a really good topic. I know you mentioned the 15% return, $100,000 turned into $7 million. Be interesting to see at the market return at 11.8% or whatever that number was, what the number was. It is a really big number. The compounding is what makes the difference. And so there's a big difference between compounding and simple interest. So simple interest, if I start with $1,000 and I made 10% this year, I made $100 in gain. And if I start the next year and I make 10% on my $100, on my $1,000, it's another $100 gain. However, if we're compounding, I start with $1,000. The first year it goes to $1,100. But then the second year I earn 10%, not off the original $1,000, I earn 10% off the $1,100. And so that's not $100 in return, it's $110. And then the third year it's $1,210. And so you can see where this is going. You get a few years like that, let alone a few decades like that. And the returns become very, very powerful. Now, if you can do that in some sort of fashion where you don't have to pay taxes on the gain every year, then you're really, really making magic.

That's really interesting, Nolan. And the answer to your question, at the 15%, it's about $7 million. At the 11.88%, it's about half of that. So you can see where the differential of just 3% can make such a huge difference over a long period of time. And as investors, we're trying to invest over the long term. And let that compounding work for us and let that time work for us and let our money work for us. We also wanted to mention another topic or concept that we talk about in terms of compounding. That's the Rule of 72. Can you explain to the viewers what that is, the Rule of 72, and then why is it relevant to the question of why we pick stocks rather than just invest passively here?

That's just a really good topic as well. We don't hear this necessarily talked about at backyard barbecues on the 4th of July, but it is an important one. The rule of 72 just tells me how long it takes for my money to double. So 72, if we're using a formula for it or an equation, 72 goes into the numerator and whatever my return is goes into the denominator. So we've been speaking a lot about how excited investors are that they finally can get 4% on their CDs, or at least earlier this year you could get 4% on a CD. So if we use 4 as a denominator and 72 as a numerator, and we say if I'm rolling CDs at 4%, how long does it take for my $100,000 to double? It's 18 years is how long it takes. Now, if you swap the 4% with a stock market type return at 10 or 10%, and we put 10 into the denominator, a little over 7 years the money doubles. And earlier, I know you were talking about compounding and individual stocks and why we picked them. Really what we hope to do is to be able to find some stock that's a winner, some early Apple, early Google, some Netflix that when they were still, you had to go, go to the mailbox to get the, the DVD by mail before they start streaming. If I could have bought those shares, you know, at the height, I was up 40 for 1 or something. And so what we hope to do through the stock market and buy an individual businesses is we're hoping to find some winner. At the very least, it really changes the dynamics of how I may participate in the market. You know, if I'm just a broad-based holder of an index or a mutual fund and I don't really know what I own and I don't have a lot of conviction, when I hear news like the debt ceiling or we're going into an election or China-US tensions breaking out, I'm a lot more likely to think I should just sell my shares or not invest until the clouds part. However, if I own Apple or Nvidia or some company that I'm convinced that no matter what happens in the broader economy, this company is going to be a long-term winner, I'm less likely to sell at an inopportune time and thus reap the rewards of being a long-term investor.

Absolutely. No one— we really do love the term long-term investing here. When we take a look at the statistics, it really does bear out that you that you do quite well if you can find some of those winners. And we want to give, of course, the disclaimer that there's no promises in the investing world. There's risk along with any investments. Purely hypothetical examples that we discussed here in topic 1. With that all being said, we're going to move on to topic 2. So topic 2, we're going to say travel stocks are outperforming in 2023. The first thing I would say, Nolan, revenge travel is a term that we've been seeing around, around over the last couple of years coming out of COVID Revenge travel truly is a thing. People are traveling more, much more than they did even back before the pandemic started. We saw— I'm going to throw up some statistics that we found. The amount of travel that's going on in 2023 is much more than we saw in 2019. So take a look at that on the screen. We looked at the JETS ETF. That's the ETF that tracks the airline stocks. That's up about 25% over the last 3 months. We also have been taking a look at the cruise lines over the last few months. We've said that a number of times here in this program. Carnival Cruise has more than doubled its stock share price in 2023. So we're seeing some major moves in travel-related stocks. Nolan, can you talk about what's going on here? And then from there, what are some, some of the best ways to play this revenge travel theme?

This is certainly the turnaround space of the year. If you think about what's happening in travel, it's the exact opposite of what's happening in healthcare. But for the exact same reason. Healthcare stocks after COVID got a real big boost. Now COVID is over, so a lot of people that held off on these procedures are now getting those procedures. And so some areas of healthcare, like health insurers, are starting to have to pay a lot more in coverage, and that means their earnings are being pressured. And so that's causing a lot of these healthcare stocks to really not do as well. For pharmaceutical stocks, it's a similar thing. People took these COVID-19 vaccines and other medications at the height of COVID Now that COVID has sort of crested, a lot of that big bump that they got in revenue and earnings seemed to be more temporary. And healthcare has really sold off. If you think about what's happening in travel, it's the exact opposite. A lot of people held back on trips and experiences during the height of COVID They were scared about being in close quarters with, with other people, and they just wanted to stay, stay home with their loved ones and protect themselves. Now, 2 or 3 years later, now it's time to play catch-up, and they're doing that in droves. And so if you look at the hotel business, you take a look at travel stocks, not only hotels, but take a look at the Ubers of the world, people getting out and about and moving around. Uh, we like Airbnb here. It's another stock that's been a beneficiary. But this year so far, nobody's been a bigger beneficiary than the airlines. And the cruise companies. And I think rightfully so. You mentioned travel and the travel numbers. This 4th of July, I think we're going to have more travelers go through TSA screening than at any point since 2019. So it's definitely back. It's back with a vengeance. And I think it's going to be here to stay. So big, big action in the travel sector. We're rolling up our sleeves, getting busy. But that cruise line area we do like. Earlier in the year, we favored the bonds. The bonds have all returned really nice returns. And now it's time to take a look at the, at the stocks. We think there are probably some legs here in travel.

Well, no, Nolan, I know I'm counting down my days to get out on a trip here soon. So I'm sure others are feeling the same way. So we are seeing great strength in travel, like you said, from airlines to cruises, even hoteliers, other sort of tangential businesses that are involved in travel one way or the other, bookings and things like that, which is all really good, of course, for that industry. Is that saying something more broadly about the economy, in your opinion?

Yeah, now we have to talk about the macro factors again, because interest rates were going up this year because inflation had been an issue. That just means, you know, more dollars chasing goods and driving the price of goods and services up to a level that the government got very uncomfortable with. So interest rates started to go off to cool the— started to go up, excuse me, to cool the economy, to bring the level of increases back to a more normal level. In Fed speak, it's about 2%. If you think about the, the economy, about 70% of it is driven by the consumer. And if consumers are not holding back on spending, they continue to spend apace, that's a problem. That means those inflationary numbers are not going to be coming down as fast as the Fed likes, which gives them more reason to keep rates high and to continue to raise rates. So it's a real big catch-22.

It is an interesting point. Inflation does seem to be coming down, which is positive. People are out spending, which is also positive. Maybe we're looking toward that soft landing that we're all hoping for. With that being said, Nolan, do you have any final thoughts as we take the viewers into the July 4th holiday weekend?

Yeah, I'm going to wish everybody a wonderful 4th of July with your family and friends. You can finally stop worrying about the markets. The markets are doing fine and taking care of themselves and hopefully Looks like we're setting ourselves up. The conditions exist for a prosperous second half of the year. If you're like me, it's never too early to be talking about sports. I'll be brushing up on my fantasy football work because I'm planning to enter some drafts come Labor Day. So I'm wishing everybody a happy Fourth.

Excellent, Nolan. Again, we'll remind the viewers, we'd love to see your comments on whether you think the stock or the bond market are going to do better in the second half of the year. And with that, we'll wish you a wonderful Fourth of July weekend, and we'll see you again next time.