Markets ended the week basically unchanged despite a continued rotation out of tech, a breakdown in the price of oil and a much-anticipated Fed interest rate hike. On Wednesday, the Fed increased short term rates quarter of a percent, the second increase this year. Fed Chair Janet Yellen noted an improving labor market as the justification and hinted that a third increase was likely this fall. She also clarified the process of reducing the Fed’s balance sheet by not reinvesting principal payments of bonds the Fed bought during the financial crisis. So far the markets have been able to take this tightening cycle in stride, but there is concern by some analysts that Yellen could move too far too fast and trigger an economic slowdown.
We were also seeing sharp selling in the technology sector, which has seen dramatic gains since the first of the year. Some of it is profit taking, based on stretched valuations, as well as investors buying shares in areas seen as more attractively valued. Industrial, Finance, and Health care have been the main beneficiaries. This is referred to as rotation where money moves to sectors in the market that money managers project are more attractive. You could say it’s a way of taking profits in one area, and buying those that have more chance for appreciation going forward. This is why diversification is so important for the individual investor, as these kinds of moves are nearly impossible to anticipate.
A further development is Amazon’s $13.7 billion bid for Whole Foods market. Amazon has already disrupted the retail landscape and it appears it’s turning its attention to the grocery world. The ramifications of this are profound. Shares of Kroger, Walmart, Target, Costco and Supervalu dropped sharply on the news. Amazon’s delivery system could do to food what it did to the malls. For one thing, this will likely drive down prices as Amazon will not see the need to make an immediate profit. And it will dramatically increase competition in an industry with already razor thin margins.
For the last few years Amazon has been building urban warehouses offering goods delivered within an hour or two, largely in more populated areas. With the Whole Foods purchase, they are adding over 400 stores to this network. This can only add to their ability to deliver goods, especially perishable food items within a very short period of time. Even more so, these locations could become centers for customer pickup. It’s an example of how our major technology companies are re writing the social and economic landscape.
D. Scott Peterson is CEO and head investment manager for Peterson Wealth Management may be reached at 775-673-1100/775-423-8007 or at Petersonwm.com.