The Consumer Staples Select Sector SPDR ETF (NYSEArca: XLP), the largest exchange traded fund tracking the consumer staples sector, traded lower Thursday after Dow component Coca-Cola Co. (NYSE: KO) gave downbeat 2019 earnings guidance.
In midday trading Thursday, Coca-Cola was down more than 7%, on track for its worst intraday performance in over a decade. Coca-Cola is XLP’s second-largest holding at a weight of 11.23%.
“The soft drink giant reported fourth-quarter earnings that met expectations, but it forecast that 2019 earnings per share could rise or fall by 1 percent — meaning less than the $2.08 per share it earned in 2018. Wall Street’s consensus projects were earnings of $2.23 per share in 2019,” reports CNBC.
Examining XLP
XLP provides “exposure to companies from the food and staples retailing, beverage, food product, tobacco, household product and personal product industries in the U.S.,” according to State Street.
With the business cycle potentially slowing next year, defensive sectors could be embraced by investors. Consumer staples, health care and industrial sectors typically outperform during the so-called slowdown period of a business cycle when economic growth starts decelerating but remains positive, the economy runs beyond its full capacity and monetary policy becomes restrictive.
Coca-Cola “has been battling currency headwinds, which it said hurt its fourth-quarter earnings by 10 percent. Rising import and transportation costs last year forced it to raise prices on its soft drinks in North America,” according to CNBC.
The world’s largest soft drink maker has also been hampered by some emerging markets issues.
“Additionally, economic conditions in certain emerging markets, like Central America, offset growth in India and Central and Eastern Europe. For example, in Argentina, unit case volume declined by double digits as the country entered a recession in the second half of 2019,” notes CNBC.
Investors typically shift into consumer staples during bouts of market volatility because of the sector’s relatively generous dividend payouts and the slow-and-steady nature of the consumer staples business – consumers usually continue purchase basic products that staples firms sell regardless of market or economic conditions.
XLP is up a bit more than 7% this year.
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