Federal Reserve Report Sends Casino Stocks Plunging

Wednesday saw casino stocks in steep decline for the second time this year, this time on warnings from the Federal Reserve. Economists warn that COVID-19 did more than affect peoples’ health. It also changed their mindset about traveling and spending money. Should we expect to see continued market volatility for gaming companies?

Until people feel secure, many won’t gamble. And, if they won’t gamble, then stocks won’t be attractive to investors. Wednesday’s incident is a perfect example, as gaming stocks plunged for the second time in three months.

May 2020 Market Events

Wednesday, May 16, 2020, marked another day of volatility in casino stocks. MGM Resorts stock price dropped from 14.91 to 12.78, before falling further to 11.85 one day later. Caesars started the week with a 10.26 stock price and by Thursday, they were sitting at 9.46.

Other companies like Eldorado and Red Rock saw their own prices fall by more than 15 percent.

Federal Reserve Chairman Statement

Federal Reserve Chair Jerome Powell’s speech earlier in the day triggered Wednesday’s volatility. Raising concerns, Powell told his media audience that the scope and speed of this economic downturn are without modern precedent, worse than any recession since World War II.

“We are seeing a severe decline in economic activity and in employment, and already the job gains of the past decade have been erased,” Powell said.

Powell’s comments sent stocks falling, especially for industries like gaming who rely on people having a steady stream of disposable income.

Investors Fear Uncertainty

The main issue here isn’t the damage, economists say. It’s the fact investors can’t predict when things will improve.

“Uncertainty is what kills stocks,” said Dr. Craig Depken, an economist with the Belk College of Business at UNC Charlotte. “And in the gaming industry, the uncertainty is greater than in other sectors right now. We’re facing a really big negative impact that’ll stretch on for several years.”

After the first crash in March, some gaming stocks recovered at least partially because there was less uncertainty, Depken said.

What Will Be The New Normal For The Gaming Industry

Despite an uncertain path forward, the industry started to create plans for a new normal in gaming. There were deadlines put in place for when states could reopen, masks bought, and plans established. But in many cases, those deadlines weren’t met. Now, groups like the Federal Reserve are warning about further economic challenges. That damages any industry based on tourism and disposable income.

“Firms projecting into the future, they do scenario building,” Depken said. “A lot of firms will be saying ‘I have no idea what to plug in here.’ Will there be a second wave? People like to bet, but they have to be in the casino. Well, how do I get there? I’m not boarding a plane. Will I drive to Vegas?”

It’s not just how people will get to the casino, but who will be willing to make the trip, Depken said. Investors right now are projecting out two to three months or even six months out. In that timeframe, will finances recover to the point that tourists once again descend on Vegas?

“Let’s say Vegas reopens,” Depken said. “Maybe people drive from California and Arizona. [Maybe] people get on the plane. But I don’t see that happening in numbers that move the market in the short to medium run. Gaming is very volatile.”

When Will Stocks Rebound?

So if three to six months is too soon, when should we expect stocks to rebound? Depken said it depends on how successful companies are with reintroducing themselves to would-be gamers.

“Casinos will have to come up with a way of signaling [they’re] open for business,” Depken said. “You can come here and be safe, your family can come here and be safe. I don’t think there’s anything the government can do to address that. How do you certify that the rooms are clean, that the chips are clean?”

Steps To Reopen Nevada To Gaming

Nevada offers a glimpse at what that might look like. The Nevada Gaming Commission provided a list earlier this month of requirements casinos have to follow before they can reopen.

Each operation must clean and disinfect all of its hard and soft surfaces in accordance with the Centers for Disease Control’s guidelines. This has to be documented and verified with the commission.

Also, casinos must train their employees on both the proper cleaning procedures and how to prevent the spread of infectious diseases. That includes learning about social distancing, handwashing, and how not to spread germs at work.

How To Remove Uncertainty From The Market

The key factor is just removing the uncertainty, Depken said. If people trust that things are back to normal, then they’re more likely to return to traditional plans. He pointed to companies like MGM, which has already seen a slight uptick to 13.85 a share as of Friday afternoon.

MGM has access to overseas operations, which are more likely to fully open before casinos in America. That gives investors some assurance. Other casinos, the ones that have sportsbooks and run online gaming, also give assurance as they don’t solely rely only on face-to-face customer interactions.

“When sports come back, I don’t think it has to come back with 75,000 people in the stands, [but] then I could see the gambling stocks bouncing back,” Depken said. “What the market is looking for is reduced uncertainty.”

About the Author

Brian Carlton

Brian Carlton is an award-winning journalist who has covered casinos, the gaming, and finance industries for more than a decade. His work has been published by the BBC and a variety of newspapers across the U.S. He currently writes for Colorado Sharp and Bonus.com.