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Leisure industry takes hit as travelers bunker down to avoid Delta variant

Brian Sozzi gives his latest take on the economic recovery as the hospitality industry starts to take a hit due to concerns surrounding the Delta variant and how restaurants have been able to avoid this economic downturn at the moment.

Video Transcript

MYLES UDLAND: All right, welcome back to Yahoo Finance Live on this Tuesday morning. Brian Sozzi, you are taking a look from an [INAUDIBLE] note from the team over at Jefferies on the state of the US recovery. And things are kind of flatlining here-- have been flatlining, let's say-- over the last several weeks.

BRIAN SOZZI: Yeah, Jared inspired me, Myles, in the last segment when he was talking about market crashes in October. And my ears definitely perked up. I love writing about market crashes. Nonetheless, good note from friend of the show, Jefferies's Aneta Markowska. A good note from her this morning. Certainly, no stranger to our airwaves.

Noting this-- I'll set this up first. She's saying it's clear that the Delta variant is the main culprit behind the recent stall in economic activity. The weakness over the past eight weeks has been concentrated in high contact activities, such as restaurant bookings, consumer foot traffic, flight activity, and hotel occupancy. And we have some of those charts here for you. I'll start with hotel occupancy and ADR, or Average Daily Rate.

And you can see in that chart here, that downtrend in hotels and people staying at a hotel for work, for vacation, whatever it is, that is starting to weaken compared to the comeback that was really beginning, that began, I would say, in earlier this year, but then, also, of course, gained steam over the summer, as more people got vaccinated and before all of these Delta variant headlines really gained steam. And then, even just looking at the stock prices, too, you have hotels, Hilton, Marriott, really under pressure here over the past three months, in many respects, tracking this data that Markowska is-- that track that she follows in real time.

And it's not just hotels. It is also restaurant bookings. Restaurant bookings, according to OpenTable and Jefferies data, you could see it there. You mentioned it, Myles-- flat line. But if you look a little closer-- you can stick your eyes right up on the screen-- you can see that has weakened a little bit further here in the first couple of weeks in August.

Now, I just mentioned the weakness we're seeing in a Hilton, a Marriott, and a Delta. But we're not seeing a lot of weakness in restaurant stocks. Darden's shares, the owner of Olive Garden and Longhorn Steakhouse, they've been doing well in recent months. McDonald's shares have been doing really well. Interesting to note today, there is a report that McDonald's is looking at closing indoor dining activity. So, potentially starting to feel the effect of the Delta variant, but again, the stock price doing well, all things considered.

And last but not least here, a chart from Markowska on the retail foot traffic. So retail foot traffic to stores is also starting to weaken here as well. Online traffic is holding up well again, but you look at this chart here. Throughout August, that traffic has come down at retail stores, as the Delta variant infections and hospitalizations, as that data has, in fact, picked up.

But, again, we're not seeing it in the retail stocks. Target and Walmart, they traded down on earnings days. But their stock has been holding up well, all things being considered. Retailers, we've been talking about all month long-- very, very strong second quarter, strong third quarter outlooks.

So there are some disconnects here in the market, Myles. I'm starting to wonder if the canary in the coal mine for the market in September into early October is, in fact, those travel stocks. It's a Hilton, a Marriott, Delta. Those stocks, again, have been under pressure here because of the variant. You know, eventually, does-- doesn't McDonald's shares, do they come under pressure? Do they come out and warn if they, in fact, close their indoor dining activities? To be determined.

MYLES UDLAND: Yeah, and, you know, they have-- in this note, there's a discretionary foot traffic chart that shows it by state, with Florida, California, Texas, and New York on there. And you can see Florida, traffic has just plunged over the last foot traffic to basically malls and retail locations-- has just plunged over the last month. So there's certainly some indication on the local, the specific impacts there.

And I guess, though, Sozzi, to come back to the stock market conversation around some of this data, and you say canary in the coal mine, I think the challenge for-- I guess the challenge for investors who want to look at a stalling recovery and then get bearish with the market is you've got several. First, you've got the market's own momentum-- seven straight months higher for the S&P 500, difficult to get too, you know, bearish on the setup there, if you just look at the market's overall momentum, its moving averages and all that sort of stuff.

The other thing is that those-- these are knowns, right? Everybody knows that there's been a change in consumer habits around some travel on the margins and some impact to airlines on the margin, some impacts to hotels on the margins. So what's the new information? Maybe it's-- I mean, is McDonald's closing indoor dining around the country going to send the market down 10%? I'd be surprised if that ended up being the case, right?

Yeah, so-- you know, so what's the news on the margin around the economic recovery that comes as a surprise to investors? Because, you know, I think another point I made briefly, but try to highlight in the brief today, everybody's eyes are on the same three things. It's on earnings, it's on the Fed, and it's on the Delta variant. So from where are we going to get the kind of market surprise that changes the story, I think, as we head into the second part of this year?

BRIAN SOZZI: Yeah, it really boils down to--

MYLES UDLAND: Second part the end of the year. There's only four months left.

BRIAN SOZZI: Yeah. Yeah, I think it really-- it might just stem from early September, mid-September. Does that household name company come out and offer an intra-quarter warning? Do the airlines, who love giving their intra-quarter updates, does a JetBlue, does a Southwest come out here and say, hey, the Delta variant is really-- we can confirm some of these real-time data that the economists are tracking here. And this is how much it's going to impact us financially.

A lot of these companies present at the investment banks-- excuse me-- now that earnings season is over. It might just be, we need to see that report. The market needs to see that it is, in fact, impacting sales and profits for a lot of large companies.

MYLES UDLAND: Yeah, I mean, Southwest did. Like, we've-- companies have literally done this. And then you go through where the areas of real weakness are on the earnings lines. It's Zoom, it's Peloton, Clorox, to go back four weeks into earnings season. It's the plays that-- to flip this around, if the airlines are hurting, who should benefit? Well, those are the companies that are coming out and warning. So there's a challenge here for building the case around this kind of story being a major negative impulse for the markets, let's say, but certainly something that we'll be tracking as we get through and into the month of September.

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