Since the first mention (of which we are aware) by a Federal Reserve official of a possible third round of quantitative easing (QE3) in mid-July, WTI and Brent crude oil prices have risen 2% and 7%, respectively, and were up as much as 14% in mid-September. While geopolitical concerns have played a role in that oil price trend, liquidity introduced by the repurchases of mortgage-backed securities has also hurt. Over that same time frame since mid-July, the S&P 500 has risen 5%, with a low only 1% below its mid-July level, but the NYSE ARCA Airline Index (XAL) is flat, after falling as much as 10%.
We believe that the various quantitative easings undertaken by the Fed have served more to prop up liquid asset prices, including commodities, than they have boosted economic growth. Almost certainly, the hoped-for wealth effect of higher stock prices, higher employment and potentially, real estate values, have at best a lagging effect on growth. Unfortunately, for the airlines, the almost immediate upward bias to fuel prices created by QE3’s liquidity injection is a near-term negative for their fundamentals, while investors simultaneously worry about the impact on airline revenues of the softer economic growth that creates the “need” for quantitative easings to begin with. It makes matters worse that global economic growth has been slowing—which is showing up in a tepid rate of US airline passenger unit revenue (PRASM) growth, to around flat in September. While the jury is out on the longer-term impact on economic growth of quantitative easings, we have little doubt that it hurts airline fundamentals and stocks over the near term.
Moreover, macro concerns, as reflected in the downward revisions in GDP growth rates since early this year, and concerns about how the fiscal cliff is dealt with in Washington, have resulted in a “risk-off” market sentiment that has contributed to the avoidance of cyclical and economic-sensitive sectors like the airlines. Investors appear to be holding back on investing in the airline sector because of the political uncertainty.
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