Fueled by strong earnings, solid revenues and ongoing consolidation, the red hot airlines index (^XAL) is leading the market and the transportation sector (^DJT) to another all time high. And yet, the good fortune of this economically sensitive sector may actually be a better barometer of investor sentiment than it is a gauge of economic virility.
That's because at a time when government data has been temporarily disrupted, the temptation to find fresh economic clues is great. Unfortunately, so is the chance of misreading them.
"It's telling us unquestionably that transports, and most certainly the airlines, are in a bull market," says Jonathan Hoenig, of the Capitalist Pig, in the attached video. "But it's hard to extrapolate what it means for the consumer." Specifically, Hoenig argues that trying to link something like passenger miles or coffee sales or demand for sneakers to economic growth is risky.
"I think we put way too much emphasis into the consumer," he says. "Consumption does not power the economy. It's production. It's the creation of new wealth, not the eating up of wealth - which is really what consumption is - that powers the economy forward."
To that point, this Chicago-based hedge fund manager says while he certainly isn't going to stand in the way of a powerful uptrend such as what is happening in airlines, he is on watch for other clues that could be more indicative.
As far as how to play it, Hoenig says the biggest advantage you can have in any market is trading in the direction of the prevailing trend.
"Unless you see airlines falling in reaction to good earnings, don't fight this trend," he says. "I wouldn't count the consumer out, but I don't think it's the consumer, per se, that is what we need to power the economy forward."
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- Jonathan Hoenig