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

On Thursday morning, the Dow Jones Industrials 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 and Coca-Cola 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.

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.

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 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.

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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.

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