The Dow Fights to Stay Positive; Are Merck and Coca-Cola Signaling a Recession?

The Dow Jones Industrials fell back from an early gain Thursday, but strength in bonds and recession-proof stocks pointed toward doubts about the economy.

May 29, 2014 at 11:00AM
Longview

On Thursday morning, the Dow Jones Industrials (DJINDICES:^DJI) initially jumped out to solid gains as investors weighed the 1% reduction in first-quarter U.S. GDP and a big drop in first-time unemployment claims. Yet as the bond market continued to see yields fall, the Dow lost all of its gains before bouncing upward again to 14 points in the green as of 11 a.m. EDT. Merck (NYSE:MRK) and Coca-Cola (NYSE:KO) were among the best performers in the Dow Jones Industrials in early trading, and given their characteristics of being resistant to recessionary conditions, their positive moves raise questions about whether investors are preparing for the end of the economic expansion.

Ko

Throughout 2014, investors have generally prepared for weak first-quarter GDP numbers to reflect temporary phenomena like unusually cold winter weather. As a result, when initial estimates of economic growth came out earlier this year, the Dow didn't respond with a major move downward. Yet underlying the market's mood lately has been growing nervousness about how much further the Dow Jones Industrials can climb during this bull-market period.

Mrk Vaccine

Source: Merck.

In response, investors have turned to stocks with defensive characteristics. Merck, for instance, is up more than 1% today, and its pharmaceutical business provides reliable cash flow from a stable of blockbuster drugs. Merck has its share of long-term risk, as it needs to keep developing its pipeline of future drug offerings in order to sustain overall revenue. Yet with a dividend above 3%, the pharmaceutical giant attracts investors who are willing to take on that risk in the hopes of finding a stock that will hold up better in a recessionary environment than its Dow peers. People can't choose to stop taking drugs they need to survive, and that gives Merck staying power that consumer-discretionary stocks and makers of less vital products lack.

Coca-Cola and Wal-Mart (NYSE:WMT) also gained ground today, and both of those companies exhibit defensive characteristics as well. Coca-Cola products might not be an absolute necessity, but with the drink giant having branched out into noncarbonated beverages such as water, tea, and sports drinks, its products are part of many consumers' weekly grocery runs. Wal-Mart's business has tended to grow in past recessions, as customers who can afford pricier stores in better economic times often become more bargain-conscious and trade down to Wal-Mart under financial strain. Both Coca-Cola and Wal-Mart have had their growth troubles in the recent past, which makes it even more likely that share-price gains reflect anxiety among stock market participants rather than confidence in their specific business prospects.

Obviously, the U.S. economy will fall into recession at some point. For now, though, it appears most likely that the economy will bounce back from the first-quarter drop, and that purchases of defensive stocks like Merck, Coca-Cola, and Wal-Mart are simply ways to diversify stock portfolios with lower-risk names.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola. The Motley Fool has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers