One of the best things about contributing to Nasdaq.com is that I get to write about some exciting stocks. Nasdaq has long been the place where cutting edge companies list, whether in tech, biosciences, fintech or any other groundbreaking areas of the economy, and those are the things that I cover the most here. Sometimes, however, the best indication of the potential for gains in even those dynamic sectors and industries comes from something much more mundane and, quite frankly, boring.
This morning, for example, the ultimate “boring” company, Coca-Cola (KO), released their Q4 2020 earnings and in that report was something that could well set the tone for more exciting stocks for months to come. It may seem strange to say that Coca-Cola’s results can have any bearing at all on the other kind of stocks I am talking about here. After all, how can the performance of a fizzy drinks and snack company possibly impact the prospects for a young tech disruptor?
That's because it is not the performance from KO that matters; it was something else in the report.
The headline numbers from Coca-Cola were pretty good, although I would contend that they were good for all the wrong reasons if you were looking at them as an indicator for the broader market. They made 47 cents per share, topping Wall Street estimates for profit of 42 cents, but did so on revenue that came in lower than expected.
That tells you that they did well in terms of cutting costs to navigate a still-challenging environment last quarter. Given Coke’s global reach and sensitivity to world-wide growth, that is not good news for anyone else. Achieving good results by cutting costs works on the level of a single company but if you extrapolate that into the global economy, you have potentially a huge problem. Cost cutting means laying people off and cancelling capital spending plans, which in turn means slow economic growth at best, and a very real risk of a recessionary trend. If other firms have been following, in other words, we are in for a rough couple of quarters to start 2021. There was, however, one real bright spot in KO’s earnings for the market as a whole.
For the first time since the pandemic hit, the company gave out forward guidance. It wasn’t great, but it was there.
That is important on several levels. It means that Coca-Cola, a company that has its finger on the pulse of the global consumer like really no other, is regaining confidence that consumer behavior is once again becoming predictable. That hints at a stability that has been missing for nearly a year and that traders will welcome back. And when traders are feeling happy and relieved, they are far more inclined to buy risky assets such as stock in the aforementioned imaginary tech disruptor.
That is because markets are often much less rational than most people want to think. Those of us who spend hours every day researching the fundamentals of companies and economies want to believe that every market move is rational, but that isn’t the case. The biggest moves in any market are in fact driven by emotion. Just as fear can create a big down move, so relief or optimism can prompt buying that goes beyond the logical level.
Basically, that is what we have seen since March, with stock indices shooting back up to record highs even as the public health effects of the pandemic worsened. That move wasn’t about reality, it was about optimism, and KO’s return to issuing guidance will leave a lot more traders and investors feeling optimistic. As strange as it may seem, therefore, Coca-Cola’s earnings report is a good thing for seemingly unrelated much more dynamic stocks, and for the market as a whole.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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