Historically, so-called "sin stocks" have held up exceptionally well in bear markets. Demand for alcohol, sex, gambling, cigarettes and firearms tends not to ebb and flow as much as the broader economy. Historically. But over the past year, the USA Mutuals Vice Fund (VICEX) is off about 42% -- slightly worse than the S&P 500. The fund's manager Charles Norton told BusinessWeek that while casinos have been weak, many of the firm's other vice-oriented holdings have been beaten down unfairly: "The fundamentals don't really matter in this current market."
That would certainly seem to be the case so far: When the market's down 42%, any long-only fund will be getting its stuff handed to it. With Las Vegas at the epicenter of the foreclosure mess, it's not surprising that heavily leveraged casino companies are underperfoming. And casinos are not really as recession-proof as other forms of gambling because the upscale ones especially are as much about tourism as gambling. The more affordable state lotteries have seen their sales decline but not by that much.
As for sin stocks, it might be too late for investors to start buying them: If the stock market is poised to rebound, recession-resistant companies will tend to be the laggards.
But if the stock market goes down another 40% in 2009, it'd probably be good for investors to stock up on Jack Daniels: the drink, not the stock.
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