Now you’ve heard the (bad) news: the yield curve has just inverted again, recession fears are rising and, to top it off, after inflation hit a 41-year high last week, investors are beginning to fear that the Federal Reserve could raise interest rates to as much as 0.75% at its next meeting.
The stock market tumbled in response, with the Dow Jones down 2.5% at 11:15 a.m. ET this morning and the S&P 500 falling even steeper – down 3.4%. Cruise stocks are among today’s casualties, with Royal Caribbean (RCL -8.34%) shares down 8.3%, carnival society (CCL -9.23%) 9.5% drop, and Norwegian Cruise Line Holdings (NCLH -10.90%) leading the entire sector down with a drop of 11.2%.
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, although it is difficult to predict the future, historically an inverted yield curve – which simply means that interest rates paid on short-term Treasury bills have risen more than interest rates on longer-term Treasuries – has been considered one of the best predictors of a recession (like the Great Recession). A recession, in turn, means a shrinking economy in which consumers are spending less money, including on things like cruise vacations.
So that’s a good reason investors in cruise stocks might feel nervous today.
The second reason is that with inflation soaring and the Federal Reserve considering this to be one of its most important tasks in controlling the recession, the odds increase that the Fed will aggressively raise rates. interest to fight inflation.
And for cruise ship investors, that could be an even bigger worry than the more widespread fear that the economy is deteriorating, i.e. entering a recession. Consider:
During the pandemic, cruise lines have taken on a lot of debt — $20 billion at Carnival, for example, $11 billion at Royal Caribbean, and $6.5 billion in new debt taken on by Norwegian Cruise. Servicing all that debt costs money, and as interest rates rise, the more Carnival, Royal Caribbean, and Norwegian Cruise will have to pay, eating away at their profits and possibly delaying even the day these companies become profitable.
Indeed, when you add the risk of recession (and a loss of cruise business and the revenue it generates) to the risk of having to pay higher interest charges on debt, cruise lines now face to a double whammy of bad economic news that could push profitability even further into the future than previously assumed.
That’s why cruise stocks are down today.