Insights

Why Cruise Stocks Sank on Monday

What happened

By now, you’ve heard the (bad) news: The yield curve just inverted again, fears of recession are on the rise, and to top it all off, after inflation hit a 41-year high last week, investors are beginning to worry that the Federal Reserve could raise interest rates as much as 0.75% in its next meeting.

The stock market has tumbled in response, with the Dow down 2.5% as of 11:15 a.m. ET this morning and the S&P 500 falling even harder — down 3.4%. Cruise stocks number among today’s casualties, with Royal Caribbean (NYSE: RCL) shares down 8.3%, Carnival Corporation (NYSE: CCL) falling 9.5%, and Norwegian Cruise Line Holdings (NYSE: NCLH) leading the whole sector lower with an 11.2% decline.

So what

What do higher interest rates, recession fears, and the “yield curve” have to do with cruise line stocks? Let’s break it down step by step.

First, while it’s hard to predict the future, historically, an inverted yield curve — which basically just means that interest rates paid on short-term Treasury bonds have gone higher than interest rates on longer-term Treasury bonds — has been considered one of the best predictors of a recession (such as the Great Recession). A recession, in turn, means a contracting economy in which consumers spend less money — including on such things as cruise vacations.

So that’s one good reason investors in cruise stocks might be feeling nervous today.

The second reason is that with inflation spiking, and the Federal Reserve considering it one of its most important jobs to control recession, the chance is increasing that the Fed will raise interest rates aggressively to fight inflation.

Now what

And for cruise investors, this might be an even greater worry than the more generalized concern that the economy will get worse — that is, enter a recession. Consider:

During the pandemic, cruise lines took on a lot of debt — $20 billion at Carnival, for example, $11 billion at Royal Caribbean, and $6.5 billion in new debt assumed by Norwegian Cruise. Servicing all of this debt costs money, and the higher interest rates go, the more money each of Carnival, Royal Caribbean, and Norwegian Cruise will have to pay, eating into their profits and potentially even delaying the day these companies turn profitable again.

Indeed, when you add recession risk (and a loss of cruise business and the revenue it produces) to the risk of having to pay higher interest costs on debt, cruise lines are now facing a double whammy of bad economic news that could push profitability even farther into the future than it was already assumed to be.

This is why cruise stocks are going down today.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Carnival. The Motley Fool has a disclosure policy.

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