Look at the stocks that are leading the market right now

Many of the stock market’s top performers in the first half of this year were exactly what you’d expect if you’ve been following the news.

Big technology companies were well represented at the head of the pack, led by Nvidia, which makes computer chips that power artificial intelligence programs. It was closely followed by Meta, the owner of Facebook, who has promoted its own AI prowess. Tesla, the electric vehicle champion, was not far behind.

But what were cruise ships doing near the peak of the stock market?

By the middle of the year, three of the major cruise lines — Carnival, Royal Caribbean Group and Norwegian Cruise Line Holdings — were among the top 10 stocks in the S&P 500.

Recall that just three years ago, in the early months of the coronavirus pandemic, all cruise lines suspended operations, and shares of publicly traded cruise lines have been devastated in subsequent months.

As fears of contagion fade and pent-up demand for pleasure travel erupts, cruise lines have experienced a remarkable change of fortune.

Inconsistent returns

Each of the cruise line stocks made amazing gains during the first six months of the year, but they’re still down significantly from the start of 2020.

Here are their returns, according to FactSet:

• Carnival, up 134 percent for the first six months of 2023 but down 63 percent since the start of 2020.

• Royal Caribbean Group, up 110 percent in the first half of 2023 but down 22 percent since 2020.

• Norwegian Cruise Line, up 78 percent in the first half of 2023 but down 63 percent since 2020.

Returns like these can be confusing if you don’t know what’s been happening on the planet for the past three years. But factor in the pandemic and subsequent economic recovery, and the performance of cruise line stocks and bonds is following suit.

It is part of a larger pattern.

Just as cruise lines are starting to come into their own, a range of companies that thrived during the pandemic are now laggards. Peloton, Zoom and Etsy are trailing in this year’s stock market derby. And large pharmaceutical companies, such as Moderna and Pfizer, whose stocks soared as the companies provided scarce and much-needed vaccines against Covid-19, are among the worst performers in the S&P 500.

The pandemic

In short, it wasn’t until December 2019 that the first reports of the emergence of a novel coronavirus began to come from China – and in late January 2020, the World Health Organization declared a pandemic underway. Cruise lines began canceling port visits in China.

In January 2020, the Diamond Princess, a luxury ship owned by Carnival, embarked on a fateful voyage in Yokohama, Japan. More than 3,700 passengers and crew were trapped on board for weeks, with little information about the pandemic.

But the virus spread relentlessly, and more than 700 people eventually tested positive. In those early days of the pandemic, when people had no natural immunity to the disease and effective treatments and vaccines were not yet widely available, nine passengers died.

All major cruise lines have suspended operations as passengers have canceled their bookings en masse. It became clear that a cruise ship was not an ideal place to be in the middle of a pandemic.

In the stock market, cruise company shares plummeted throughout 2020. In that pandemic year, Carnival fell 57 percent, Royal Caribbean 44 percent and Norwegian 56 percent. The companies had virtually no revenues and mounting debts, and their ability to continue was questionable. They survived by taking on massive debt and paying skyrocketing junk bond yields, which were necessary to attract investors.

The cheerful atmosphere necessary for a successful holiday at sea seemed unattainable.

A beginning recovery

It wasn’t until 2022 that their finances — and stock prices — stabilized, and it wasn’t until this year that they began reporting enough income and cash flow to show signs of deleveraging and returning to steady profitable operations. Speaking to equity analysts after reporting earnings at the end of June, Josh Weinstein, Carnival’s CEO, said the company’s business volume was approaching 2019 levels for the first time since the pandemic began and, in some metrics, began to surpass it.

According to a transcript of the same session, David Bernstein, the company’s chief financial officer, said that Carnival was putting cash into debt reduction, “realizing more than $8 billion in total debt reduction through 2026,” down from a peak of $35 billion by early 2023. .

These debt payments, combined with higher earnings, should enable the company to approach “investment grade” in its bond ratings by 2026, Mr. Bernstein said. Due to Carnival’s improving financial picture, yields on the company’s debt have fallen and bond prices, which are moving in the opposite direction, have risen.

Of course, the specifics of each company matter. What the cruise lines have in common is that they all have heightened safety procedures to prevent the spread of future outbreaks on board, have introduced new ships, implemented cost-cutting measures and launched new marketing campaigns. Wall Street analysts, including those from JPMorgan Chase, Bank of America and Jefferies, gave them high marks and helped drive their share prices higher.

Maybe the magic of sea cruising is back. Surely no one needs a repeat of the bleak events of 2020.

In pre-pandemic times, I’ve taken a few nice cruises. On one trip, three generations of my extended family were able to see the world together, while participating separately in age-appropriate recreation—aboard, in the water, and on land. So I’m personally happy about the start of a renaissance of sea cruising, although I’m not quite ready to sail again.

As an investor, I see the cruise lines’ stock performance this year less as a question of whether now is the right time to buy their shares, but more as a confirmation of the ever-present need to diversify. What seems safe today can easily become dangerous tomorrow.

Harry Markowitz, a Nobel laureate in economics who died last month, transformed modern investing with his teachings on how rigorous diversification can reduce risk. Ten years ago, during a volatile period in the stock market, he told me that ordinary investors would be better off forgetting individual stocks and buying broad low-cost stock and bond index funds instead.

Allocate them in a ratio that you feel comfortable with, then devote yourself to more pleasurable pursuits. Mr. Markowitz convinced me. As for pleasurable pursuits, go with what pleases you.

That could even be a sea cruise, if you’re into that and, at this stage, safe enough for a worry-free trip.