Major stock market averages opened modestly higher today (Dow +86 pts; SPX +.2%). The materials sector (+1.5%) is leading the way after paint maker Sherwin Williams (SHW) reported excellent second quarter results. Financials are up (+.8%) and industrials (+.6%). However, utilities & communications services sectors are in the red. Commodities are mostly lower in early trading. WTI crude oil is back down under $56/barrel this morning. Oil is in the middle of a tug-o-war between geopolitical tensions with Iran, and modest global oversupply. Bonds are mostly lower in price as yields tick higher. The 10-year Treasury yield is hovering around 2.05%. Junk bonds, which usually trade with the economy and corporate earnings, are holding their own this year. The SPDR High Yield Bond ETF (JNK) has been roughly flat over the last three months after recovering from last year’s selloff.
Coca Cola (KO) reported slightly better than expected second quarter results and the stock is up 5.7%. Sales shot up 12% from year-ago levels, a growth rate not achieved since 2011. As usual, traditional soft drink sales in the US were weak, but the real story here is that other types of low-sugar drinks did very well. Global case volume rose 3% boosted by strong growth in China. The company raised its 2019 forecast for organic sales growth to 5% from 4%. Management said the stronger dollar is hurting profits, which are expected to be flat this year.
Lockheed Martin (LMT) also exceeded Wall Street forecasts, reporting 8% sales growth and 16% earnings growth. Demand for the F-35 fighter jet and also missile systems pushed order backlogs higher. Management raised full-year sales/earnings guidance as well. Despite excellent results, the stock is down .9% this morning. That could be because the stock is already up 35% so far this year. By the way, United Technologies (UTX) also reported very strong results in its aerospace/defense business today. That stock is also down modestly.
Central banks are in focus for investors. The European Central Bank (ECB) meets this week to assess a possible interest rate cut. They’ll certainly discuss today’s move by the International Monetary Fund (IMF) to reduce its 2019 global economic growth forecast to 3.2%. IMF’s forecast at the beginning of 2019 was 3.5%. Today, ECB chief Mario Draghi said that if Europe’s economic situation deteriorates further, monetary stimulus may be needed. Investors are expecting a modest 10 basis point (or .1%) cut by the ECB. And of course, the US Federal Reserve will meet next week to consider the need for monetary stimulus as well. If either the ECB or Fed don’t follow through, you can bet global stock markets will react negatively.
Morgan Stanley’s Mike Wilson says economic growth and corporate earnings growth has slowed and won’t trough until next quarter. He says a 10% correction in the near-term is absolutely possible. He believes the major stock market averages are about 10% higher than they should be, and we need to see some P/E multiple contraction. But once the correction is through the cycle can continue. At the moment, equity market risk is the greatest in those parts of the market that haven’t yet corrected, such as defensives and high quality value.