Casinos Among The Hardest-Hit Businesses During Economic Downturns

When times are good in the U.S. economy, Americans have no problem wagering some of their disposable income at the casino. When the stock market and the economy start to feel like too much of a gamble themselves, it’s casinos and their investors that start to suffer.

Casino Stocks Lag

In the past six months, the VANECK VECTORS/GAMING ETF BJK is down 28.6 percent compared to just an 8.5-percent decline for the SPDR S&P 500 ETF Trust SPY.

While some of that decline may be due to concerns over Las Vegas and a potential U.S. recession in 2019, much of it has to do with a potential slowdown in Macau and the Chinese economy thanks to the ongoing trade war.

Macau gross gaming revenue growth dipped to the single digits for three consecutive months in the second half of 2018 before bouncing back a bit to 16.6 percent in December.

Recessions And Gambling

The late-2018 sell-off contracted earnings multiples across the board in U.S. stocks.

A study in the Journal of Gambling Studies confirms the link between gambling revenue and economic strength.

The 2012 study conducted in the Netherlands by Csilla Horváth and Richard Paap found that, from 1959 to 2010, casino gambling revenue in the U.S. was closely correlated to economic growth.

The study found that casino gaming revenue grows during periods of economic expansion, while it stagnates during economic recessions. The same study found that lottery gambling, by contrast, is relatively recession-proof.

Casino stocks are certainly not alone in being vulnerable to recessions. Travel and leisure stocks, construction stocks and home furnishing stocks all tend to underperform during economic recessions.

These consumer discretionary stocks all share one common trait: they rely on consumers spending their disposable income. When consumers are feeling skittish, they tend to hold onto excess income and wait for times to get better.

Recession Chances Remain Low

The good news for casino stock investors is that, while the risk of a U.S. recession has certainly been on the rise, the latest CNBC Fed Survey in the month of December found that economists still see less than a 1-in-4 chance of a U.S. recession in 2019.

The survey found that only 23 percent of economists anticipate a recession in the next 12 months, up from 19 percent in November. Of course, positive developments on the trade front could provide a major boost for investor and economist sentiment, especially when it comes to U.S. casino stocks with exposure to Macau.

Here’s a look at how each of those three U.S. casino stocks have fared in the past six months:

Wynn Resorts, Limited WYNN is down 38.8 percent.

Las Vegas Sands Corp. LVS is down 29.1 percent.

MGM Resorts International MGM is down 13.2 percent.

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