U.S. Equities
Roaring ‘20s: How pent-up demand could fuel recovery
Chris Buchbinder
Equity Portfolio Manager
Todd Saligman
Equity Investment Analyst
Lisa Thompson
Equity Portfolio Manager

With major league baseball’s spring training just around the corner, you may already be daydreaming about the smell of cut grass and roasted peanuts, hearing the crack of the bat and the roar of the crowd — just to feel normal again.

If so, you are not alone — not among fellow Americans weary of the COVID pandemic nor within the context of history. This would not be the first time Americans have lived through a period of austerity brought on by a pandemic that resulted in burgeoning pent-up demand. In 1918, the Spanish Flu and World War I largely curtailed social gatherings and other activities across the country. 

To be sure, the U.S. was a very different place in the early 20th century, but consider that attendance at baseball stadiums in 1918 was half that of the previous year.

By 1919, however, the pandemic had largely subsided, the war was over and attendance at games soared from 2.8 million in 1918 to 6.5 million in 1919. The decade that followed — the Roaring ‘20s — coincided with the first golden age of the automobile. Americans eager to see the countryside bought nearly 26 million cars and 3 million trucks in the 1920s, according to Automotive News.

Could pent-up demand for travel and leisure drive a Roaring ‘20s today? 

“I think the quick introduction of vaccines is a major game changer, even with all the growing pains we are seeing in terms of distribution,” says equity portfolio manager Lisa Thompson. “A travel recovery is coming, and I think it can happen relatively quickly. Everybody is eager to go on vacation or to just get out and do stuff. The question is whether the recovery has legs. I think we will have to see how the vaccine rollout evolves, among other things.”

Ready, willing — and able — to spend

Indeed, cabin fever appears to have taken hold of consumers everywhere. There are signs that Americans are prepared to act: Savings rates have soared since the start of the pandemic, and though they have slowed a bit in recent months they remain relatively high.

Many consumers have boosted their savings during the pandemic

The U.S. savings rate has increased since the start of the COVID pandemic from a long-term average of 6.5% to a pre-COVID average of 7.2% to a current average of 12.9%. Sources: Bureau of Economic Analysis, Refinitiv Datastream. Long-term average is from 1990–2019. Pre-COVID is as of December 31, 2019. Current is as of November 30, 2020.

“Once there’s an all-clear, I expect the desire to travel plus the ability for many consumers to spend means we could see a powerful recovery, even if it takes a few years,” adds Thompson, who has spent more than 30 years as a professional investor.

“This crisis is much different than the global financial crisis in 2008 or any of the other crises I’ve seen in my career. Today, looser fiscal policy, looser monetary policy, a very strong banking system and high personal savings rates could help drive a very sharp pickup in demand.”

These conditions not only can benefit the travel and leisure industries but also the broader economy. To be sure, there will probably be hiccups along the way, and some areas will likely recover more quickly than others.

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Passenger loyalty: A tailwind for cruise lines

Cruise ships became the epicenter of the COVID crisis in February 2020, when 3,700 people were quarantined aboard the Diamond Princess after a shipboard outbreak. At the time, the ship accounted for half of all known cases outside mainland China.

“This industry has gotten so much negative media, yet people are still booking cruises for 2021 and 2022 at prices higher than they were in 2019,” says equity analyst Todd Saligman, who covers cruise lines and U.S. and European airlines. “That’s pretty indicative of the demand. There is a loyalty and enthusiasm among cruisers that people who don’t cruise may fail to appreciate, and that loyalty has persisted through the crisis.”

In fact, more than 70% of respondents to an industry survey said they will cruise again.

Loyal customers can keep cruise industry afloat

The U.S. savings rate has increased since the start of the COVID pandemic from a long-term average of 6.5% to a pre-COVID average of 7.2% to a current average of 12.9%. Sources: Bureau of Economic Analysis, Refinitiv Datastream. Long-term average is from 1990–2019. Pre-COVID is as of December 31, 2019. Current is as of November 30, 2020.

While cruising has resumed in Europe, the U.S. Centers for Disease Control imposed a “no sail” order that has not yet been lifted in North America.

“It’s not clear when the ships will set sail again, but I believe they will be cruising near full utilization quicker than many people expect,” Saligman says.

Although cruise stocks have rebounded from their March lows, Saligman believes select cruise lines continue to represent opportunity for long-term investors.

What’s more, with intense focus on healthy sailing practices, “There’s a case to be made that they could one day be considered among the cleanest places on earth to vacation,” says equity portfolio manager Chris Buchbinder.

Vacation plans up in the air

As was the case in the cruise industry, global air travel was down an estimated 66% in 2020, about 20 times worse than the previous record. Within the U.S., which is more dependent on business travel, the devastation was worse: Air travel declined as much as 95% in the early months of the crisis.

The rollout of the vaccines and prior experience gives Saligman confidence that demand will bounce back. “I believe it will happen quickly as the vaccine rolls out,” he says. “We also saw this after the September 11 attacks. A lot of people thought consumers would never fly again, and traffic recovered quickly.” 

Indeed, in China, where the virus is largely under control and the economy has rebounded, domestic air travel has nearly returned to pre-COVID levels.

Air travel in China has soared back. Will the U.S. soon follow?

The chart compares the percent change in the number of domestic airline passengers in China and the U.S. from January 2019 through October 2020. After a period of relative stability from January to December 2019, domestic air travel in China began to decline in January 2020, bottoming at –84.8% in February 2020, and recovering to –1.6% in October 2020. In the U.S., after a similar period of relative stability, domestic air travel declined 51% in March 2020, bottoming at –95.7% in April 2020 and recovering to –59.6% in November 2021. Sources: Capital Group, Bloomberg, Bureau of Transportation Statistics. China data is the change in combined revenue passenger kilometers of the three largest Chinese airlines and is through October 31, 2020. U.S. data is the change in combined revenue passenger miles for U.S. airlines and is through November 30, 2020.

The ripple effect

A revival in travel demand can also have a powerful ripple effect, creating the need for a range of goods and services and helping drive job growth across a variety of industries. Among these are aircraft manufacturers, jet engine makers, hotels, casinos and restaurants — all of which were devastated by the pandemic.

Consider aircraft engine makers, which operate a recurring revenue business model. Companies like Safran and General Electric build the engines and sell them at a modest profit, but the engines must be serviced regularly, and the engine makers can generate a great deal of revenue from the service contracts.

“They're not making any money this year, because airplanes are grounded, but as air travel resumes, those manufacturers will potentially see their cash flows rebound,” Buchbinder says.

Unlike other sectors of the economy during COVID, aircraft engine makers are not going to see digital disruption upend their business. “After all,” Buchbinder adds, “there are no digital aircraft engines.”

Markets tend to anticipate recoveries

Markets often anticipate recoveries in the underlying economy, so it’s important to recognize underlying trends early. Consider the global financial crisis, a period when the housing and automobile industries were severely beaten down. By 2012 it became clear that demand was building, thanks to changing demographics and an aging auto fleet. In both industries, a full recovery took several more years, but a rebound in auto- and housing-related stocks anticipated the recovery in demand and earnings. From February 2009 through December 2010, auto sales fell 6% while auto stock returns advanced 496%.

Auto stocks rebounded ahead of sales after the global financial crisis

The chart shows U.S. auto sales and automobile stock returns from October 2007 through October 2014. In the depths of the global financial crisis, auto sales fell from 1.3 million in October 2007 to 855,213 in September 2009. By October 2014, auto sales had recovered to the previous high. Auto stock returns declined from October 2007 to February 2009 before recovering to the previous high by April 2014. From February 2009 through December 2010, auto sales fell 6% while auto stock returns advanced 496%. Sources: RIMES, Standard & Poor's, WardsAuto InfoBank. Stock return data reflects the total return of the S&P 500 Automobiles Index, indexed to 100 on October 31, 2007. Sales data reflects the average number of light vehicles sold each month over the previous year.

More recently, since the introduction of the vaccines, shares of companies across a number of travel-related industries have registered strong gains. Select companies likely have room to run, Buchbinder says. 

“The market often runs ahead of the actual recovery in earnings,” he says. “I think a year from now we will be in a very different environment where demand and earnings for some of these companies will begin to recover in a more meaningful and sustained way. Our job as investors is to identify those companies that stand to benefit most from the changing environment.”

Maintaining a balance

Students of history can look to many examples of past crises and declines that were followed by powerful recoveries thanks in part to pent-up consumer demand. Examples include the travel sector after 9/11 and the housing and auto industries following the end of the great financial crisis in 2008–2009. 

As long-term investors, Capital Group’s investment professionals seek to identify trends early enough to select the companies that stand to benefit from these dynamics. For investors and their advisors, it is important to make sure portfolios are balanced with exposure not only to growth strategies but also to strategies focused on more value-oriented companies, like many of the travel-related stocks.

A review of more than 4,000 portfolios by Capital Group’s Portfolio & Analytics team found that investors significantly reduced allocations to value equities over the last three years. It may be time to rebalance. 

Returns for leading growth companies have continued to be strong, for good reason. But it may be shortsighted for investors to become seduced by the runaway growth stories, considering that many of the beaten down stocks in travel and other sectors have attractive valuations. And recently there have been some early signs that the market rally may be broadening as many of these stocks have posted meaningful gains.

Investors have scaled back their exposure to value funds

The chart shows the relative portfolio exposure of the growth, blend and value categories within U.S. large cap equities as of June 30, 2017, and June 30, 2020. In those three years the value exposure decreased from 33% to 25%. The blend category exposure increased from 34% to 41%. The growth category exposure increased from 33% to 35%. Sources: Capital Group, Morningstar. Values may not add up to 100% due to rounding. The growth category consists of stocks that have higher price-to-book ratios and higher expected growth rates and often pay little or no dividends. The value category consists of stocks that have lower price-to-book ratios and lower expected growth values and often pay dividends. The blend category consists of both growth and value stocks.

 “We’ve just been through a market downturn and recovery where the great secular growth companies led during the decline and on the way back up,” Buchbinder says. “That is a historically unusual pattern. As the vaccines roll out and the recovery broadens we will begin to see companies in the travel industry, or perhaps energy or financials, all of which had been very hard hit during the downturn, participate in the recovery.”

Chris Buchbinder is an equity portfolio manager with 28 years of investment experience (as of 12/31/2023). He holds bachelor's degrees in economics and international relations from Brown. 

Todd Saligman covers U.S. and European aerospace and defense companies and airlines, as well as U.S. cruise lines as an equity investment analyst. He has 10 years of experience and holds an MBA from Harvard and a bachelor's from the University of Pennsylvania.

Lisa Thompson is an equity portfolio manager with 35 years of investment industry experience (as of 12/31/2023). She holds a bachelor’s degree in mathematics from the University of Pennsylvania and is a CFA® charterholder.

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