What happened
Entertainment stocks had a great start to the day on Wednesday, and cruise line stocks were no different. A lower-than-expected reading of inflation is pushing the market higher, and these are some of today's leaders.
Shares of Carnival (CCL 0.43%) were up as much as 11.5% in early trading, while Norwegian Cruise Line Holdings (NCLH 0.83%) jumped 13.2% and Royal Caribbean Cruises (RCL -0.26%) was up 10.6%. Shares of the companies were up 11.1%, 12.7%, and 10.3% respectively at 11:20 a.m. ET.
So what
The topic of the day is inflation. So far this year, the market has been worried about the impacts of inflation on spending and the reaction by the Federal Reserve to increase rates to combat inflation. For now, it looks as if inflation is easing.
The Consumer Price Index (CPI) rose 8.5% versus a year ago according to the Bureau of Labor Statistics. That was down from 9.1% a month ago and lower than the 8.7% estimate from economists.
Core CPI, which excludes food and energy prices, which can be very volatile, was up 5.9%, matching June's level. The takeaway is that the drop in inflation overall is mainly due to falling energy costs.
The Federal Reserve has been raising interest rates to combat inflation, and we may be starting to see the impact of those rate increases. The downside is that the economy may slow as a result of higher rates, which could end up hurting the jobs market and earnings of people who take cruises.
Now what
Inflation can be a double whammy for cruise lines. High energy prices mean higher costs to operate cruises, which run on fossil fuels. But inflation also means that people have less discretionary money to spend because excess funds are being eaten up by gas, food, and other costs going up.
While slower inflation should be good for cruise lines, they're not out of the woods yet. You can see below that they're still losing money from operations and that debt that piled up during the pandemic is still weighing on their balance sheets. A small change in inflation doesn't fundamentally change the operating environment.
CCL Cash from Operations (TTM) data by YCharts
The stock market seems to swing back and forth from bullish to bearish on cruise line stocks, but the trend has been lower all year. Weak operations and a heavy debt load won't easily be overcome, and that's why I'm staying out of these stocks, even on a good day like this.
