In The News...
I suppose it is a busy week when news like Verizon completing its purchase of Yahoo! is overshadowed by an even bigger story. That would be the news that Amazon is set to buy Whole Foods for $13.7 billion.
Amazon primed to buy Whole Foods: This came out of nowhere (at least to me). However, being familiar as I am with Amazon's history and company culture, nothing it does can surprise us anymore. The details are sparse as I write this, some of which I am intentionally avoiding in order to give my immediate reaction, void of other opinion.
Do not underestimate this deal, even if you shop at a large grocer like Safeway or Kroger. This deal to buy Whole Foods signals Amazon's intent on diving deeper into grocery retail. In many ways this deal makes sense. Amazon is the leader in selling goods at the most competitive prices. Whole Foods is considered so pricey by many that it is known as Whole Paycheck. Now the bigger story that results from this...
What the deal means: There is a reason that major retailers Costco, Walmart and Kroger were each down -7%, -4% and -9%, respectively, on Friday. People think of Amazon as a retailer, which is incorrect. Amazon is a logistics giant that dominates in its ability to get things from Point A to Point B. (In fact, I have long thought that Amazon might buy Uber.) If logistics were a marathon, Amazon is on mile 10 while most retailers have barely left the starting line. It is its logistics horsepower that makes Amazon a major threat to traditional grocery giants. This deal likely means food costs will go down too, which is good for our grocery bills but bad for food producers.
Whole Foods was stuck in no man's land. Baby boomers, which comprise roughly one-third of the population, do not shop there enough. Millennials mostly buy online or are willing to do so once the option comes available. This leaves those in their mid-30s to mid-50s as the primary Whole Foods customer, which is a narrow, shrinking market.
Whole Foods is sensitive to economic factors too. Organic food is available at more retailers than five or ten years ago. If the economy worsens, buyers would simply switch to a cheaper grocer in order to save money. In short, I just don't see long-term customer loyalty.
What's next for Amazon? I will be fascinated to see where this goes. I have written previously about the slow death of brick and mortar store locations and the adverse impact that would have on commercial real estate. But ironically, I wouldn't be surprised if Amazon uses certain Whole Foods locations to set up their futuristic Amazon Go stores, explained here:
In The Market...
The S&P 500 gained +0.1% this past week. Let's look under the hood...
Stocks: I am not sure last week was quite as positive as the sector-by-sector view indicates. Most were in the green, but of those in the red it is interesting that Technology was the big loser. Perhaps this is short-lived, perhaps investors are pivoting from technology and into other sectors or perhaps Tech will soon drag the other sectors down along with it. Tech finished this week roughly -4% below its previous high set just over a week ago, so to be clear it isn't anything dramatic, yet.
One investment that many accounts own is a real estate investment trust, or REIT, for short. That fund was up nicely this past week, but will it continue to move higher? Here is what I'm looking at, with sights set on seeing the price break higher above the upper pink line shown here:
I believe this fund (VNQ) will rally higher, otherwise we would not still own it. We'll see what the next few weeks brings.
Bonds: We continue to see the same rally unfold within bonds that I have mentioned for the past couple months. This plays well for some of our holdings. I believe there is more room to run. And coincidentally, long-term bonds rallied yet again coming off the news that the Federal Reserve will raise rates for the 4th time since it started to do so 18 months ago. More on that next week.
In Our Opinion...
I am not sure if I made this up or subconsciously heard it somewhere, but I like the following phrase:
"On a long enough timeline, any prediction can come true."
I say this as a few more prominent investors predict that the stock market will endure a massive crash in the near future. A crash, they estimate, could be upwards of a -90% loss. These are some of the reasons I routinely hear, based on fear or weakening investor demand:
- The Fed - specifically years of artificial monetary stimulus that they believe has caused irreparable damage. Years of bond-buying and a 0% federal funds rate, which were done in tandem to suppress interest rates and stimulate economic growth
- International debt problems - in China, greater Europe and elsewhere
- Aging baby boomers - who will slow their savings habits and begin to spend more and invest less
- Millennials - who are slower to start careers compared to previous generations and seem less interested in investing
- Risks of war or terrorism
- President Trump's economic policies
I am not going to start listing names and sharing links (you can easily search for them) as that is beside the point. The fact is, many crash predictors have been at it for years, going back to the initial rebound coming off the last recession bottom in 2009. They have been routinely, flat-out wrong each time. Meanwhile, the market has steadily risen with the exception of some stagnant periods (2011, 2015) and a few 10% or so short-term losses (which are actually normal).
So what makes this time different? I have no idea and neither do they.
They would argue that this market rally is driven by unsustainable methods, namely the Fed and other international central banks. But even if they are right this time, they will not be vindicated. The same way that a batter who strikes out nine-straight times is not universally praised if he gets a hit in his 10th at-bat. You cannot keep making bold predictions - keep being wrong - and then pat yourself on the back if/when it actually does happen.
Furthermore, many of the crash predictions you will hear are made using VERY wide windows of time. They don't say a crash will happen "next month" or even "in the next three months". Rather, they will say something broad/vague like "this year or next" or "sometime soon". They do not tell you exactly how they are invested themselves and they give no attention to the previous market gains that they missed out on by exiting the market years ago (at least I presume they have been out of the market, or there is a real problem with their sentiment). In some ways, missing out on a gain is just as damaging as absorbing a loss.
The biggest difference between today and even a decade ago is the presence of social media, which allows literally anyone to make a bold market call and catch some traction. Now imagine if you are someone with clout... You can see how easy it is to spread provocation. A lot can be said and interpreted through a blog post or 140 characters.
So what do you do? Nothing.
Stay the course. There are periods that we reallocate more conservatively, using certain bonds and even cash (though not preferred). When we do it though it is not based on some doomsday prediction. It is based on the ongoing market analysis that I perform each day.
In Our Portfolios...
What are exchange-traded funds (ETFs) and how do they differ from mutual funds?
As you know, we invest in ETFs, which have risen in popularity over the past 20 years to become widely used investment options for investors who want to easily diversify. Similar to mutual funds, ETFs track specific assets, sectors or regions.
- Want to own silver? You might buy an ETF that tracks the price of silver.
- Want to own technology but without the risk of owning one particular stock? Buy an ETF that tracks the tech sector.
- Want to invest in Russia? Buy an ETF that mirrors the Russian stock market.
You get the point. Mutual funds have long been the traditional means of investment diversification. A mutual fund is created and managed by an investment firm, who buys and sells individual stocks/securities that comprise the fund. Similar to ETFs, each mutual fund is established for the purpose of tracking a particular segment of the market. However, mutual funds tend to carry much higher overhead costs to run them than ETFs due to increased infrastructure. These costs are passed along to the investors who own shares in the fund. Their investors pay for such overhead costs via internal expenses that come out of their investment value, despite little disclosure. There are expenses for owning ETFs too, but they tend to be a fraction of what mutual funds charge.
Mutual funds remain very relevant because they are the primary investment vehicle for 401k plans. This might not be the case if not for firms like Vanguard that have reduced their fund expenses to match those of their ETF peers. However, many companies continue to offer overpriced mutual fund options within their 401k investment lineups, and unfortunately, many participants still own them.
ETFs are much more flexible than mutual funds. If you invest in a mutual fund your money is not actually invested until the end of the market day. ETFs, on the other hand, trade like stocks. They are easier to buy and sell, making them more liquid. This makes a big difference to us as investment managers.
Finally, ETFs tend to be more tax-efficient than mutual funds. I won't get into the weeds on why, but they typically are.
What's New With Us?
For those who actively use our Morningstar service, we are in the process of merging the old Scottrade account data within the new TD Ameritrade accounts. This is for account reporting purposes and only affects what you see in Morningstar. The project will be completed by early July. If you receive a monthly Morningstar account summary I will post your May and June summaries when the project is completed.
Morningstar is a useful account reporting tool. It allows you to view all of your investment accounts in one, consolidated snapshot. This means you can view your TD Ameritrade account plus others like your 401k, other IRAs and brokerage accounts. Please call Gale or myself with questions.
Have a great weekend,
Brian E Betz, CFP®