AIRLINES : Continue Struggling
(Wed, 29 July 2020). When it comes to investing in airline stocks, millennials were wrong (again). The sector continues to struggle amid the pandemic. The brutal performance of American Airlines highlights the perils of investing in aviation at the height of the pandemic.
Aviation stocks have lost over 50% this year, proving that millennial traders were wrong to bet big on airlines. Millennials went crazy for airlines after they collapsed in April, assuming that they will quickly recover. Airline stocks may be permanently affected by the Covid-19 pandemic, so traders were wrong to assume a full recovery. Airline stocks have lost millennials over 50% in the year to date, according to data from S&P and Bloomberg. This dramatic decline comes as internet retail industry stocks (including Amazon) have risen by over 55% across the same period.
Millennial traders have been piling into airline stocks in recent months. Users of Robinhood–popular with millennials–went crazy for airline ETFs in May. With airline stocks still fading, millennials have demonstrated poor judgment. Rather than rationally evaluate the real prospects of airlines, they simply followed the herd.
Millennials Lose Big on Airline Stocks
The Covid-19 pandemic has hit the airline industry hard. Even veteran fund manager Warren Buffet dumped his stocks in four airlines in early May. Shares in American Airlines (NASDAQ:AAL)) fell by nearly 70% between mid-February and early April. Millennial traders took this as a sign to buy, with AAL becoming the sixth most-bought stock on Robinhood in April. Millennials didn’t only snap up stock in individual airlines. They also went big for airline industry funds. One airline ETF–U.S. Global Jets ETF–grew from $33 million in early March to $1 billion by early June. Robinhood users were a significant driver of this rise, with the app witnessing an 8,000% increase in accounts with positions in the ETF. This gamble hasn’t paid off for millennials. Taking data from the S&P 500, Bloomberg published a highly revealing chart today.
The chart confirms that airline stocks have declined by 53.69% in the year to date. Shares in the internet and catalog retail industry have risen by 55.77%. As Liz Ann Sonders points out, airlines have been the worst-performing industry so far this year. The internet retail sector has been the best.
Don’t Always Buy Low
The contrast highlights just how wrong millennial traders were about airline stocks. They may have assumed that airlines are bound to recover at some point. This assumption would be valid during a “normal” recession caused solely by economic factors. The current downturn isn’t the result of the usual economic cycle of expansion and contraction. It’s the result of a pandemic. It was highly risky to assume that airlines would rebound to their former glories. This is why millennials jumped on airline stocks like rabid zombies. They assumed that these companies were being sold at a considerable discount and that they could make an easy fortune.
The “true” value of airline stocks is likely much lower than pre-pandemic highs. Analysts such as Deloitte have warned that the Covid-19 pandemic will have a long-term impact on the travel industry. Business travel is likely to be permanently reduced, while even tourists may be fewer in number. Scores of airlines have already filed for bankruptcy. Aviation consultancy CAPA has predicted that most airlines need government support to survive.
This is not the sign of an industry about to bounce back strongly from a sharp decline. Millennial traders were very naive to suppose that airline stocks would quickly recover. They were desperate to beat the market, so they followed the herd at their own peril. When will they learn? Judging by their predilection for Nikola and Hertz stock and even Dogecoin, they never will.
GFS ASIA TEAM
- just now