On Wednesday morning, airline stocks were dragging down industrial indices. The reason is investors forgot short-term oil-price swings do not matter. The change in stock values seems to belie the belief that markets are efficient.
Shares of Delta Air Lines (DAL), American Airlines (ticker: AAL), Southwest Airlines (AAL), Alaska Air Group (ALK) and United Airlines (UAL) were all down more than 1% near midday. However, Wall Street did not publish a splashy research note.
The sector is currently down because of Tuesday gains. The gains were fueled by rough benchmark prices that dropped more than 3%. Jet fuel is a huge expense, and the price tightly correlates with oil prices. However, the next day, oil was back up, so airline shares were moving in another direction.
Figuring out the Reason for Airline Stocks Swing
Yet, over two days, airline stocks have dropped about 1.3% on average. Oil prices are down over two days by about 1.5% as well. The lockstep move is counter-intuitive. When costs are dropping, stocks should be rising.
Investors can not criticize the overall market for the current situation. The S&P 500 is off only 0.1% over the same span. Over long periods, airline stocks don’t tightly correlate with energy prices. This might be surprising for investors. The rate of change in energy prices is more important to airline stocks than the absolute level of energy prices.
At the margin, lower oil prices help airlines. Lower costs mean airlines can drop fares, which boosts demand for air travel. Moreover, when oil prices are low U.S. consumers spend less money on gasoline. This means more money can be spent on traveling.
Share prices move every day. Yet, it is a curious move. The two-day reaction in airline stocks appears to be an overreaction. The market requires efficiency. However, traders exist to arbitrage value differences. Moreover, there are a lot of factors to account for any short-term stock-price fluctuation. But it is always a good idea to try to figure out why stocks are moving.
