Royal Caribbean Cruises (NYSE:RCL) stock has been at the center of the Covid-19 pandemic conversation along with the other major cruise lines. Most investors now know that cruise stocks took on massive debt, suffered large losses, and are looking forward to a period in which they can deleverage themselves.
That was where Royal Caribbean looked to be heading earlier in the second quarter (Q2). It was back on May 5 that the company released Q1 earnings. Those earnings provided at least some reason for positivity.
Despite reporting an earnings per share (EPS) of negative $4.58 per share on a $1.2 billion net loss, there was good news. For one, that EPS loss was slightly better than the $4.66 loss a year prior. And momentum is momentum, no matter how slight.
More to the point, though, Royal Caribbean revenues reached $1 billion, up substantially from the $42 million it recorded a year earlier.
Long story short, there was reason to believe the worst was over and that the company could be entering the beginning of a great deleveraging of the debt it took on throughout the pandemic as its ships lay anchored.
|RCL||Royal Caribbean Cruises, Ltd.||$40.50|
Emerging Pattern for RCL Stock
However, that simply doesn’t look to be the case as a very negative pattern is emerging. To no one’s surprise, that pattern relates to inflation, Federal Reserve (Fed) rate hikes, and a dimming economic outlook.
As mentioned, Royal Caribbean announced earnings on May 5. It was a day earlier on May 4 that the Fed announced it was going to raise the Fed funds rate 50 basis points in an effort to quell rampant inflation.
It was also on May 4 that RCL stock dropped precipitously. The May 5 news did nothing to halt that steep decline. It was clear that rising rates implied a rising risk of further economic downturn, thus cooling any pent-up demand for cruises.
Then, on Jun. 7, media outlets began to report that consumers should expect another large rate hike between Jun. 14 and 15.
And it was on that date that RCL stock again turned downward. So, given that Fed Chair Jerome Powell has already stated that July will look much the same, expect Royal Caribbean to continue to have trouble.
There’s not a lot that needs to be said here. There’s little reason to believe consumers are going to be rushing out to purchase cruises soon.
Seven out of 10 economists polled by the Financial Times expect the U.S. to enter a recession in 2023. JP Morgan (NYSE:JPM) strategists place that chance even higher at 85%, citing Fed policy errors, which are reverberating throughout the stock market as their indicator.
The thesis is clear: recessions aren’t conducive to a thriving cruise line business.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.