Spending rotation into services points to 'much more upside' for the travel sector

• Signs of consumers rotating their spending into services bodes well for the travel sector, says Jefferies.
• Airline stocks were mostly higher Friday while trade for the broader consumer discretionary sector was choppy.
• Stimulus checks and vaccinations appear to be having the "desired impact on consumer behavior".

The travel sector holds the potential for further upside this year following signs of a rotation in consumer spending to services from goods, according to Jefferies.

The S&P 500's consumer discretionary sector rose 0.3% in choppy trade Friday following the release of the Commerce Department's personal spending and income report for February. The headline figure showed a 1% decline in expenditures, more than the 0.7% fall expected in an Econoday consensus survey.

But the report also showed that spending on services edged up by 0.1% during the month, marking a third month of growth, albeit slower than January's rate of 0.9%.

"Within services, spending on air transport and accommodation increased notably. This is a very encouraging sign, suggesting that the vaccination campaign and reopening are having the desired impact on consumer behavior," Aneta Markowska, chief financial economist at Jefferies, wrote in a note Friday. "We expect much more upside in these sectors in the months ahead."

Some airline stocks were up Friday. Southwest Airlines rose 1.4% and Hawaiian Air parent Hawaiian Holdings gained 1.1%. Delta Air Lines rose 0.6% and Alaska Air picked up 0.4% and American Airlines turned higher, rising 0.1%. The US Global Jets ETF added on 0.9%. Some hotel stocks, however, lagged, with Hilton Worldwide down 0.6% and Hyatt Hotels off by 0.7%.

The US government this month began sending $1,400 checks to most Americans in an effort to provide relief as the COVID-19 pandemic stretches past the one year mark. More than $325 million has been sent through 127 million payments, the Internal Revenue Service, the Treasury Department and the Bureau of the Fiscal Service jointly said this week.

"[Will] the next stimulus checks be spent on goods or services? [We] expect a near-term spike in goods demand, followed by a rotation toward the service sector this summer and beyond," Markowska wrote.

Among other exchange-traded funds, the Consumer Discretionary Select Sector SPDR Fund rose 0.2% and the Vanguard Consumer Discretionary ETF moved up 0.8%.

While money is being dispersed, about 14% of the US population so far has been vaccinated, according to the Centers for Disease Control and Prevention. President Joe Biden on Thursday raised his goal for vaccinations to 200 million in the first 100 days of his administration from a previous target of 100 million. More than 133 million people in the US have already received virus shots.

The overall February personal income and spending report showed "early signs of rotation from goods to services," with most of the monthly weakness concentrated in the goods sector, highlighted by a 4.7% contraction month-over-month in durable goods spending, wrote Markowska.

Meanwhile, there is "plenty of excess capacity in the service economy, where higher demand is more likely to result in higher output and employment," she said.

The S&P consumer discretionary sector is up 0.9% this year compared with the S&P 500 index's 5% gain.