Can the Dow Climb Higher on Consumer Strength? Earnings Say Yes

Solid results from two consumer-facing stocks this week suggest a source for further market gains.

Dan Caplinger
Dan Caplinger
Apr 18, 2014 at 8:02PM
Markets

The Dow Jones Industrials (DJINDICES:^DJI) had a strong week, rising more than 2% as earnings season kicked into full gear. Yet, even as nine different Dow components reported earnings during the week, consumer-facing stocks Coca-Cola (NYSE:KO) and Johnson & Johnson (NYSE:JNJ) were among those with the best share-price performance. The strength of those two stocks suggests that a catalyst for further gains for the Dow Jones Industrials could come from consumers if the economy continues to improve.

Source: Johnson & Johnson.

Admittedly, Johnson & Johnson has become much less of a consumer-products company over the years, and its first-quarter earnings report shows just how dependent the Dow component has become on its pharmaceutical division. Global sales of consumer-care products rose 0.6% in constant-currency terms, but a strong dollar made that translate into a decline of more than 3% in dollar terms. Part of that decline came from the sale of one of its product lines, and Johnson & Johnson did see some growth in its Zyrtec allergy medicine and Aveeno skin-care products. Yet, even with consumer-care and Johnson & Johnson's medical-device segment weighing on its overall growth, J&J's pharmaceuticals business soared again during the quarter, with double-digit percentage gains even after adjusting for currency. The strength came both from established drugs and from newer treatments, and it seems increasingly likely that Johnson & Johnson will live or die by the pharmaceutical sword for the foreseeable future -- boding well for the Dow Jones Industrials given its substantial pharma contingent.

By contrast, Coca-Cola is indisputably a consumer stock, and the resurgence of emerging-market growth contributed immensely to the soft-drink giant's overall results. Volume growth of 3% in developing and emerging markets might not seem like much, but with far better gains in China. and solid strength in Russia, India, and Brazil, Coca-Cola made the most of its opportunities there while weathering the storm of controversy surrounding its carbonated beverages in mature markets in North America and Europe. Coca-Cola will have to respond to the trend against both sugary sodas and diet beverages by making a far greater transformation in its business than it has ever had to do before, as non-carbonated drinks become more popular both in the U.S. and worldwide. With the marketing prowess and brand awareness that Coca-Cola has, the company still has some ability to create the positive consumer perception of whatever products it chooses to emphasize in the non-carbonated area.

The Dow Jones Industrials reflect conditions within the entire economy, but consumers make up a huge portion of the domestic and global economies. As such, when consumer-facing companies like Coca-Cola and Johnson & Johnson report their results, it's smart to pay attention to find clues of how financially healthy consumers are, and how they could drive the economy in the future.