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On Friday (5 June), the S&P 500 closed down 2.64%, with the Nasdaq shedding 4.18%. In the UK, the FTSE 100 finished flat on the day, although the broader selling came after the market had closed. Given that global stock markets had recovered well after the March wobble, is the stock market recovery now in doubt?
Strong jobs report
Friday’s sharp sell-off looked dramatic, but the underlying reasons were actually fairly straightforward. Earlier in the day, the latest May US jobs report came out stronger-than-expected with 172,000 new jobs added. This was roughly double economists’ forecasts.
Under normal circumstances, strong employment data would be welcomed as evidence of a healthy economy. However, investors read this report as indicating that a resilient labour market increases the likelihood that the Federal Reserve could keep interest rates higher for longer, or even raise them. This spooked many and caused stocks to fall. Even though this is a specific US story, stock markets around the world are intertwined. That’s why it’s likely the FTSE 100 will initially fall today (8 June).
The direction from here
While Friday’s decline in US stocks was severe, it appears to me like it’s a short-term reaction rather than a fundamental breakdown. The same jobs report that sparked fears of higher rates also confirmed that the US economy remains remarkably resilient. I don’t see it as worrying that more people are being hired for work, especially when the recent corporate earnings season was generally very healthy.
The main risk to my view is that this week we have US inflation data coming out. If inflation remains contained, investors may conclude that Friday’s panic was overdone. However, if inflation jumps, concerns about higher rates could cause stocks to fall even further. After all, higher inflation puts even more pressure on the Federal Reserve’s voting members to increase interest rates.
A defensive stock pick
During these volatile and uncertain times, I’m led back to consider strong defensive stock ideas. For example, Coca-Cola (NYSE:KO). There’s a good reason it’s been one of Warren Buffett’s longest-held stocks, as its simple operating model has been profitable across different economic cycles.
People continue buying soft drinks regardless of whether the economy is booming or slowing. Coca-Cola itself is one of the world’s strongest consumer brands, the company generates predictable cash flow, operates in more than 200 countries, and has a long history of passing higher costs on to consumers through pricing. Those characteristics tend to make earnings more resilient than those of tech firms, which are the ones getting hit the hardest at the moment.
The stock is up 10.7% over the past year. Even if the market tumbles and Coca-Cola isn’t immune, it still has a dividend yield of 2.67%. It has increased its dividend for more than 60 consecutive years, so banking some income during difficult times is never a bad thing.
In terms of risks, the younger generation is moving towards healthier drinks choices, which isn’t great for the core product offering, Coca-Cola. Yet ultimately, I think it’s a stock that investors could consider at the moment.
Should you invest £5,000 in Coca-Cola right now?
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Jon Smith has no positions in the shares mentioned.
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