The drop in the equity markets last week may have had many an investor reaching for Rolaids, but the reality is last week's action was a return to normalcy.
Historically, the markets have been volatile, with large proportionate swings occurring in either direction. For example, in Oct 2002, the Dow loss 2.1% or more five times in a period of about three weeks. The average point loss during those five sessions was 197 points. During this same period, the Dow gained 2.6% six times, with an average point gain of 290 points. Combined, the Dow had daily moves of 2% or more 11 times during a span of just 18 sessions.
If you don't remember that volatility, don't feel bad; many other investors don't remember it either. Heading into July, the U.S. markets were enjoying a span of four years with just six Dow moves of 2% or more (three to the upside and three to the downside). In other words, volatility had left the building.
So volatility is back. What should you do? Well, do what you've always (or at least should have) been doing: make smart investment decisions. The repricing that is occurring in the debt markets is nothing more than rationality making a comeback. While it is possible that the credit markets could tighten enough to adversely affect the number of deals completed in the future, earnings estimates revisions for the likes of Goldman Sachs (GS) and Lehman Brothers (LEH) don't suggest it will happen. Conversely, profit forecasts for these firms are unchanged in July and up from June. Could this change? Sure, but it hasn't yet -- and that's a bullish sign.
Nonetheless, if you're feeling like you need to be a bit defensive, take a look at the beverage sector. Pepsico (PEP), Pepsi Bottling Group (PBG), Coca-Cola (KO) and Coca-Cola Enterprises (CCE) all exceeded earnings estimates and generated an average second-quarter growth rate of 12.2%. And if you are in the mood for something stronger, Dutch brewer Heineken (HINKY) recently raised its forecast.
Read the full analyst report on PEP
Read the full analyst report on PBG
Read the full analyst report on KO
Read the full analyst report on CCE
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