Shares of America's cruise line stocks broke a two-day losing streak on Friday, snapping back with strong gains after the U.S. Census Bureau released its retail and food services advance monthly sales report for June this morning, which showed a 1% increase in consumer spending -- news that investors are taking as "good," to balance out earlier "bad" inflation news.
Responding to today's report, shares of Royal Caribbean (RCL 1.46%) sailed 4.6% higher through 2:55 p.m. ET, preceded by Carnival Corporation (CCL 1.01%), up 5.2%, and best of all, Norwegian Cruise Line Holdings (NCLH 2.97%) -- surging ahead 5.4%.
And yet, I cannot help wondering if investors are getting irrationally exuberant about today's report.
Consider: According to CNBC, experts were predicting that today's report would show a 0.9% month-over-month rise in consumer retail spending in June, so the actual report of a 1% increase was really only 0.1% better than what was already expected. However, if you dig into the report itself, there is a second nugget of good news. In addition to the June number coming in slightly ahead of expectations, the Census Bureau revised its sales estimate upward for the month of May. Instead of a 0.3% month-on-month decline, it turns out sales only slipped 0.1% that month.
That works out to a total of 0.3% worth of better-than-expected sales across the two months -- which gives slightly more reason for optimism.
But then there's the other bad news. As CNBC and other market watchers report, all of the gain in sales from June, and from the May revision, too -- all 1.2% of that gain -- was swamped by a 1.3% month-on-month increase in inflation in June. Basically, what this means is that consumers didn't so much buy more over the past couple of months as they paid higher prices on what they bought because of inflation.
So, how good is this news for cruise stock investors, really?
Viewed in the most favorable light, I think what the data are telling us is that prices are rising, but for the time being at least, consumers are willing to pay those higher prices. That being said, a University of Michigan gauge of consumer sentiment is showing consumer confidence still near record lows at a score of 51.1 (out of 100). So the situation with consumer spending, and people's ability and willingness to spend on cruise vacations, is still pretty touch and go.
Finally, you've got the higher inflation -- which again, was the reason for increased consumer spending in June -- potentially pushing up interest rates at the Federal Reserve later this year. This would have two effects relevant to cruise stocks: making it more expensive for consumers to buy cruises and raising the cost of debt carried on cruise stock balance sheets.
On balance, I still think the situation doesn't look favorable for investors in this sector, and with two of the big cruisers yet to report Q2 earnings -- Royal Caribbean on Aug. 2 and Norwegian Cruise on Aug. 4 -- I think I'd feel a lot more comfortable investing in these stocks after they report their news than before it.