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Why Carnival Stock Fell 7% on Friday

What happened

Shares of Carnival (CCL -7.16%)the world’s biggest cruise line operator, were sliding today, in line with a broad market sell-off on fears of rising interest rates and a recession.

Although there was no company-specific news out on Carnival, the travel stock still closed down 7.2% on Friday, while the S&P 500 gave up 1.7%.

So what

For the third day in a row, stocks sank after the Federal Reserve raised the fed funds rate by 75 basis points, and Fed chair Jerome Powell said the central bank would continue to raise rates to rein in inflation, even if it means rising unemployment and an increased risk of a recession.

The slide in the stock market over the last few days seems to reflect investors’ view that the chances of a recession have increased, and that’s bad news for travel stocks like Carnival, as travel, and vacations like cruising, are especially vulnerable.

The industry is also on precarious footing after the industry was put on pause for much of the pandemic.

In its second quarter, which ended May 31, Carnival was still struggling to recover from the pandemic with an operating loss of $1.5 billion, although cash from operations turned positive. Occupancy reached 69% in the quarter, an improvement from 54% in the first quarter, but a sign that there is still significant slack in the business.

Now what

While Carnival stands to benefit from pent-up demand for cruising (assuming the recovery continues), a global recession could dash those hopes. The US economy has remained resilient in the face of high inflation, with the unemployment rate below 4%. But if interest rates continue to rise, they will eventually put the brakes on the economy, and that will only add to Carnival’s woes.

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