The world of games (gambling or otherwise) was hot on Tuesday as both casino stocks and video game stocks moved higher. These may not be seen as similar industries, but the reason they were trading higher was very similar today.
Caesars Entertainment (CZR -1.82%) was up as much as 13.8% in trading today, MGM Resorts (MGM 0.31%) jumped 7%, and Roblox (RBLX 4.10%) gained 7.5%. At market close, the stocks were up 11.4%, 7.2%, and 6.2%.
The economic news that came out today was pretty bad, but the market is up anyway and there's some logic to that. First, the Institute for Supply Management's manufacturing purchasing managers index, better known as PMI, fell from 52.8 in August to 50.9 in September, the lowest reading since May 2020. We also learned that job openings fell from 11.2 million in July 2022 to 10.1 million in August 2022, indicating that companies are pulling back very quickly.
You would think that falling manufacturer confidence and a weakening jobs market would be bad for consumer discretionary stocks like casinos and video game companies, but the market isn't thinking about that right now. What investors are worried about is rising interest rates and how far the Federal Reserve and other central banks around the world will push interest rates. Over the last few weeks, expectations for rates have gone up because inflation hasn't slowed down, but that may be changing.
If there's a slowdown in the economy, that could force central banks to slow their pace of interest rate increases or even cut rates. That's generally seen as bullish for stocks, which is what the speculation is today.
For consumer goods companies, lower rates typically mean a faster-growing economy and that's been enough to push these stocks higher today.
To be clear, all of the increase in stock prices today was from speculation about future rate increases. There's been no news from the Federal Reserve, earnings are weeks away, and there's still a generally weak economy.
For the casino industry, there's plenty of room to still be bullish. Casinos in Las Vegas are reporting record revenue as the Las Vegas Strip enjoys the most gambling it's ever seen this year. Room rates continue to be strong and spending on shopping and entertainment is still elevated as well. So, even a shallow recession would likely leave these companies generating excess cash flow.
Roblox is in a bit of a different place, facing uncertain demand from kids who are now back in schools instead of being taught from home, where video games are easier to play.
I think there's too much speculation about rates and economic activity to be buying stocks like this today. In a few weeks, we will get earnings reports that will tell where consumer spending stands and that's what will be most important. I think it's better to wait and make a decision with more information than be a buyer today.