✈️ America's grounded

What’s going on here?

US holidaymakers took time off from booking trips, which could push the stateside economy toward an unwelcome break.

What does this mean?

The travel industry’s latest earnings calls were hardly, ahem, high-flying. In fact, with US customers cutting back on bookings, "softness" was the buzzword across Expedia, Marriott, Airbnb, and Hilton – mentioned 16 times, no less. Naturally, those in the higher tax brackets were still jet-setting overseas, but that one-sided demand has left airlines slashing fares to fill empty seats on cheaper domestic flights. Even Disney’s noticed, reporting lower income at its theme parks and bracing for that to continue.

Why should I care?

For markets: Vacations are serious business.

Travel spending is a key economic indicator: because folk cover their essentials before working through their disposable income, the amount they budget for vacations hints at both their financial situation and confidence. And remember, consumer spending drives about two-thirds of the US economy, so when Americans tighten their belts, businesses feel the pinch and might start cutting costs, often by laying off workers. Combine that travel drop-off with recent data – like worse-than-expected job numbers – showing that the US economy might not be as hardy as hoped, and you can see why economists are betting that the Federal Reserve will start cutting rates in September.

The bigger picture: Investors stopped playing Risk.

After a less-than-impressive earnings season, economists are wondering whether the recent hiring slowdown and uptick in unemployment are early signs of a recession or just a temporary hiccup. But junk bond investors, who deal with the debt of high-risk companies, aren’t taking any chances. See, last week’s sudden stock market panic made investors reevaluate the amount of risk in their portfolios – and they pulled the most money out of junk loan funds since early 2020, wary of the effect an economic slowdown could have on debt-laden companies.

What’s going on here?

Bonds finally look stirred, not shaken, after rediscovering their role as a hedge for stocks.

What does this mean?

Investors know the score: bonds tend to rise when stocks fall, and vice versa. But that age-old relationship has been thrown into doubt in recent years – especially in 2022, when interest rate hikes caused both markets to plunge at the same time. That’s when the classic 60/40 portfolio – famed for its time-tested ratio of 60% US stocks and 40% US bonds – had its worst year since the global financial crisis. But during last week’s market rout, bonds finally reestablished themselves as a hedge for stock-heavy portfolios: while the S&P 500 fell by a hefty 6% during the first three trading days of August, US Treasuries saw an uptick of almost 2%.

Why should I care?

The bigger picture: Turning tide.

The economic environment is shifting in favor of bonds. See, the Federal Reserve’s interest rate hikes have brought inflation closer to its target, but recent data has suggested that those rates might’ve weighed on the world’s biggest economy more than hoped. One of the factors behind last week’s sell-off was the fact that July’s US labor market report triggered the “Sahm Rule”. That’s an eerily accurate recession signal, set off when the unemployment rate’s three-month average rises by half a percentage point from its lowest level in the past year. So now, investors are expecting more rate cuts to come soon, and that should buoy up bonds.

Zooming out: There’s always a but…

Bonds might have one headwind in the future, though. The US’s massive debt pile looks to be on an unsustainable path, with interest expenses rising faster than the government’s ability to pay them. That creates an ever-deepening hole, with more bond sales needed to plug it. So with no credible plan to balance the books, some investors may start to give the government’s debt the cold shoulder.