Coca-Cola CEO James Quincey just delivered a dire warning about the economy, and it doesn't bode well for a resurgent Dow Jones.
Every single U.S. state has begun to ease its lockdown restrictions, enabling a frozen economy to begin to thaw. Investors seem optimistic about the country reopening, and the Dow Jones Industrial Average (DJIA) has responded accordingly.
Many people believe the worst is behind us. President Donald Trump said:
Now that our experts believe the worst days of the pandemic are behind us, Americans are looking forward to the safe and rapid reopening of our country.
But not everyone is as optimistic as Trump.
James Quincey, the CEO of Coca-Cola (NYSE: KO), thinks the coronavirus lockdown’s economic impact is just starting to begin.
He expects a “U” or an “extended U”-shaped recovery rather than a “V”-shaped recovery, where the economy quickly returns to pre-crisis levels.
That’s a problem for the Dow. The current rally doesn’t look well-positioned to survive a longer economic downturn.
More than 36 million Americans have applied for unemployment benefits since the coronavirus disrupted the economy. The Congressional Budget Office expects U.S. GDP to drop 38% on an annualized basis in the second quarter.
That damage is going to fester in the economy for a long time.
Although it’s too early for Coca-Cola to assess how spending patterns will change, the company expects consumers will be less inclined to spend.
Quincey told CNBC’S Andrew Ross Sorkin:
We’re gonna have to recognize that coming after this virus crisis will be the economic impact and hangover of the lockdown, and there will be a much greater focus from the consumer on affordability or getting the prices lower.
About half of Coca-Cola’s revenue comes from channels outside the home, such as restaurants, movie theaters, and stadiums.
According to Quincey, Coca-Cola still has negative world volumes in May, although they have improved slightly after falling 25% in April.
Those headwinds won’t disappear when stay-at-home orders expire. Public spaces won’t be as crowded as before. People have to respect social distancing, which will inevitably result in lower sales.
The beverage company’s sales are a good proxy for consumer behavior; that’s one reason it’s listed in the blue-chip Dow Jones Industrial Average index.
And it’s why Quincey’s warning isn’t just a problem for Coca-Cola stock.
The entire services sector, which relies on high customer traffic, is especially vulnerable. Many companies won’t survive.
Neiman Marcus, J.Crew, and Stage Stores have already filed for bankruptcy protection. J.C. Penney could follow them soon. And UBS estimates that around 100,000 stores could close in the next five years.
It’s not hard to see why. U.S. retail sales plunged a record 16.4% in April. According to Euromonitor, they could be down 6.5% in 2020.
Joshua Shapiro, chief U.S. economist for Maria Fiorini Ramirez, said that overall sales would remain depressed because there will be a big chunk of lost jobs that don’t come back.
And people who lose their jobs tend to cut back on discretionary spending, for obvious reasons.
Falling sales and earnings will hit the Dow Jones, which is loaded with consumer discretionary stocks, including:
As there is still no cure or vaccine to the coronavirus, a second wave of coronavirus could happen this fall. A second lockdown would have a disastrous impact on the economy and could plunge the U.S. into a depression.
But even if that doesn’t happen, the recovery still won’t be as quick as investors are hoping. The Dow could lurch lower once people finally wake up to that reality.
Investors should listen to James Quincey’s devastating warning.
Disclaimer: This article represents the author’s opinion and should not be considered investment advice from CCN.com. The author owns shares of Coca-Cola (NYSE:KO).
Last modified: September 23, 2020 1:57 PM