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WEEK AHEAD

June 17-21, 2024

Tactical Signal 9

As the stock market engine continues to climb, albeit by the largest companies, the expectation is that the rest will eventually follow as the economy remains sound. Our technical indicators remain in support of a fully invested position (100%).

Last week, investors were on tenterhooks ahead of the FOMC meeting and inflation report, eagerly awaiting the Fed's next move on interest rates. In a decision that surprised no one, the Fed left the policy interest rate unchanged. They did, however, emphasize that they need more confidence that inflation is making its way toward the 2% target. The Fed's Dot Plot added a twist by projecting just one rate cut in 2024, down from the previously anticipated three, indicating the federal funds rate will sit at 5.1 percent by year's end.

Last month's unexpected inflation reading came in at a cool 0%, with a year-over-year rate of 3.3% adding some spice to the mix. This helped the equity markets rally, with the S&P 500 index posting a gain of 1.62% for the week, edging its year-to-date performance to a robust 14.63%.

Digging deeper into last week's market movements reveals a tale of two sectors. Technology stocks were the star performers, soaring by 5.8%, driven by the AI boom and impressive gains from Microsoft (+4.42%), Apple (+7.92%), and NVIDIA (+9.10%). However, this tech-fueled rally was not mirrored across the board. In fact, of the 11 equity sectors, only Technology outpaced the S&P 500 index, while the S&P 500 Equal-Weighted index declined by 0.52%. This highlights the disparity: heavyweights drove the market's gains while the broader market languished.

On the bond front, yields narrowed, spurred by the softer inflation data. The 20-year and 30-year yields dropped by 18 and 21 basis points, respectively. The Bloomberg US Aggregate Bond Index gained 1.31%, lifting its year-to-date return into positive territory.

With the June FOMC meeting now in the rearview mirror and the next one scheduled for July 30, the market's attention next week will pivot to economic indicators such as Industrial Production, Business Inventories, and the Housing Market for fresh guidance.

"We have stated that we do not expect it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2 percent. So far this year, the data have not given us that greater confidence."

— Chair Powell's FOMC Press Conference, June 12, 2024

Post-Pandemic Travel Boom - Cruising

 Royal Caribbean International will follow up the introduction of Icon of the Seas with the next Icon Class ship, Star of the Seas, in the summer of 2025.

Royal Caribbean Cruises (ticker: RCL) has demonstrated a remarkable recovery and sustained growth following the COVID-19 pandemic, emerging as a leader in the cruise industry's resurgence. Over the past six months, the company has achieved approximately 40% growth in its stock price, reaching full recovery and surpassing its pre-COVID price level.

Cruise lines experienced a significant downturn during the pandemic, following years of substantial success. During the pandemic, the industry faced severe overall challenges due to the sudden and sharp decrease in demand. RCL was not spared from the sharp downturn in performance and stock price due to lockdowns and voluntary suspension. From January to March 2020, RCL's stock price plummeted from around $135 per share to approximately $20 per share, representing a decline of over 85% in just two months. By the end of 2020, the company reported a net loss of $5.8 billion, or $27.05 per share, compared to the previous year's net income of $1.9 billion, or $8.95 per share. In response, Royal Caribbean has to implement aggressive measures to enhance liquidity, including significant cost reductions and cash preservation strategies.

Post-pandemic, Royal Caribbean has capitalized on the strong demand for cruising from both new and loyal guests, supported by robust booking trends and the addition of new ships. At the end of last year, the company reported a net income of $1.7 billion, marking a significant recovery from previous losses. The company has also surpassed its estimates with an adjusted EPS of $6.77. Fueled by increased consumer spending on experiences and high load factors, the company achieved a revenue of $13.9 billion in 2023.

President and CEO Jason Liberty attributes this success to the strength of Royal Caribbean's brands and the accelerating consumer spending on experiences. The company reported strong booking volumes and rising consumer spending onboard and pre-cruise purchases in the first quarter of 2024, with load factors reaching 107%. Royal Caribbean has focused on expanding its offerings to catch up with the demand recovery trend. The company's strategy includes introducing new ships and experiences to drive growth. In 2023, Royal Caribbean launched three new ships, which have successfully attracted new demands. The company is also investing in private destinations to elevate guest experiences. The Royal Beach Club in Cozumel in Mexico, set to open in 2026, and the Royal Beach Club Paradise Island in Nassau, expected to open next year, are part of this strategy. These private destinations are anticipated to be key growth drivers in the upcoming periods.

Royal Caribbean's next Icon Class vessel, the Star of the Seas. 

Additionally, Royal Caribbean is placing a strong emphasis on technological advancements. They have reported a significant investment in a digital travel platform designed to simplify the booking process for customers. By the end of this year's first quarter, the company reported substantial progress in integrating cutting-edge technology and artificial intelligence. These efforts aim to enhance the overall customer experience and build greater customer loyalty. Additionally, Royal Caribbean remains optimistic about future demand growth trends in the post-COVID-19 era. By leveraging these trends, the company is positioning itself for both recovery and sustained growth, ensuring it remains competitive in the evolving travel industry.

Royal Caribbean Group's post-pandemic recovery highlights its strategic resilience and market adaptability. After years of lockdowns during the pandemic, cruising is now right in the path of the boomer demographic, allowing them to travel and enjoy comfortable, hassle-free experiences. The strong financial performance of RCL, driven by robust consumer demand, strategic innovations, and technological advancements, underscores its potential for sustained growth and profitability. Investors and market watchers will undoubtedly watch Royal Caribbean as it navigates the post-pandemic era, charting a course toward renewed growth and success.

Indices as of 6/14/24

Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.

 

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