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Why Carnival, Norwegian Cruise, and Royal Caribbean Stocks Dropped Friday

What happened

Cruise tourism stocks sailed lower in the water Friday. In early trading, each of the major publicly traded cruise stocks -- Royal Caribbean (NYSE: RCL), Norwegian Cruise Line Holdings (NYSE: NCLH), and Carnival (NYSE: CCL) (NYSE: CUK) -- declined about 5% before recovering somewhat in the afternoon.

As of 3:03 p.m. ET, Royal Caribbean had recovered to a 2% loss, but Norwegian Cruise Line was still down 4.1% and Carnival had dropped 3.6%.

Image source: Getty Images.

So what

So what's going wrong with cruise stocks today? Cruises getting canceled because of COVID-19 appears to be part of the problem. According to CruiseIndustryNews.com, Carnival's AIDA Cruises had to cancel "the remainder of its season" for the AIDAluna cruise liner because of "changing conditions" -- an oblique reference to Caribbean countries closing their ports to ships with infected passengers.

Similarly in Asia, Crystal Cruises has suspended operations for three ships through April 29, and Royal Caribbean has canceled more sailings of the Spectrum of the Seas out of Hong Kong. In Hawaii, Norwegian Cruise Line announced it was postponing cruises aboard its Pride of America until April.

Now what

Although disheartening, this handful of cancellations is a far cry from the broad industry shutdowns seen earlier in the pandemic. Of greater concern to investors, I suspect, is the expected rise in interest rates on debt, caused by speculation that the U.S. Federal Reserve will soon raise its target rate, which will begin shutting off the spigot of easy money from its bond purchase program.

As MarketWatch reported today, several members of the Fed have been talking up rate hikes and asset purchase slowdowns of late, with Fed Chairman Jerome Powell, for example, saying, "It is really time for us to begin to move ... to a more normal level" of interest rates. Brian Bullard, the president of the Federal Reserve Bank of St. Louis, predicted that the Fed "could begin increasing the policy rate as early as the March meeting" -- and start shrinking the Fed's balance sheet shortly thereafter.

The sooner that happens, and the higher those rates go, the more money Carnival, Royal Caribbean, and Norwegian Cruise Line will have to pay every time they roll over the principal on the more than $67 billion in debt they've collectively taken on to tide them through the pandemic.

And the further away they'll be from any return to profitability.

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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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