Commentaries
PMC Weekly Review - September 15, 2017
A Macro View: Navigating the Mighty Amazon
The e-commerce giant, Amazon (AMZN), cannot seem to find its way out of the news, and last week was no exception. Amazon announced plans to open a second headquarters, which will be known as HQ2, to supplement its current home base in Seattle, and it has created an enormous opportunity for whatever city wins the bid. In recent months, headlines regarding Amazon have been dominated with the company’s acquisition of Whole Foods (WFM), its impact on macroeconomic trends, and its growing decimation of brick-and-mortar retail outlets. The media has dubbed Amazon’s growth and dominance in the economy and financial markets as the “Amazon effect.” Typing those two words into a preferred search engine likely results in thousands of articles referencing the subject, and for good reason. But what exactly is the “Amazon effect?”
Most people generally know what Amazon does as a company: it sells cheap products on the internet with guaranteed fast delivery, which naturally would hurt traditional retail businesses. To get a bit more detailed, Amazon is disrupting the retail industry by offering customers more convenience, selection, and value than going to a shopping mall. Due to this, retailers are losing customers, market share, and employees, so it seems the majority of the buzz around the “Amazon effect” has a pessimistic or negative attitude. The Bespoke Investment Group even created the “Death By Amazon” Index to track performance of companies most affected by Amazon. Unsurprisingly, this group of stocks consists of retailers, and that index has underperformed the broader S&P 1500 Index significantly over the past two years. Furthermore, some economists have gone as far as to say that Amazon is beginning to influence the global economy, as the company might be placing pressure on future price, wage, and employment growth. Although these macro trends have yet to be proven, there is little doubt that Amazon is a juggernaut causing disruption. But is this necessarily a terrible thing?
Although retailers have generally been negatively affected by the “Amazon effect,” the company’s growth has opened doors for other industries to prosper. Given Amazon’s reliance on online credit card payments, banks and credit card companies could benefit. Also, customers have an increased expectation for precise deliveries, so logistics and software-tracking businesses who improve delivery efficiency and communication might also be in an advantageous position.
It is also worth highlighting that this is by far not the first time in history a phenomenon such as the “Amazon effect” has changed the economic environment. During the late 18th century, nearly all of the US population had some kind of involvement in agriculture. Today, due primarily to technological progress and disruption, less than 10% of the country works in agriculture, but we still produce an exponential amount of food compared to a few hundred years ago. Going back roughly 100 years, “Fordism” (referring to Henry Ford’s assembly line) disrupted the booming railroad industry by making automobiles available to a wider customer base, which created significant infrastructure needs. More recently and familiar, we also have seen disruptions by single companies, coined as the “Microsoft effect” and the “Starbucks effect.”
It is apparent that Amazon’s business model and sheer size will continue to challenge various industries and could potentially play a meaningful role in the global economy. That said, the world has continuously experienced innovation through its history, and that creates opportunity. The disruptions mentioned in the paragraph above certainly did not end in catastrophe and arguably improved overall lifestyles, employment, and economic growth. Clearly, it seems evident that only time will tell how the “Amazon effect” will play out.
The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this weekly review is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. An investor may experience loss of principal. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment strategy. Past performance is not indicative of future results.
Information obtained from third party sources are believed to be reliable but not guaranteed. Envestnet|PMC™ makes no representation regarding the accuracy or completeness of information provided herein. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.
Investments in smaller companies carry greater risk than is customarily associated with larger companies for various reasons such as volatility of earnings and prospects, higher failure rates, and limited markets, product lines or financial resources. Investing overseas involves special risks, including the volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. Income (bond) securities are subject to interest rate risk, which is the risk that debt securities in a portfolio will decline in value because of increases in market interest rates. Exchange Traded Funds (ETFs) are subject to risks similar to those of stocks, such as market risk. Investing in ETFs may bear indirect fees and expenses charged by ETFs in addition to its direct fees and expenses, as well as indirectly bearing the principal risks of those ETFs. ETFs may trade at a discount to their net asset value and are subject to the market fluctuations of their underlying investments. Investing in commodities can be volatile and can suffer from periods of prolonged decline in value and may not be suitable for all investors. Index Performance is presented for illustrative purposes only and does not represent the performance of any specific investment product or portfolio. An investment cannot be made directly into an index.
Alternative Investments may have complex terms and features that are not easily understood and are not suitable for all investors. You should conduct your own due diligence to ensure you understand the features of the product before investing. Alternative investment strategies may employ a variety of hedging techniques and non-traditional instruments such as inverse and leveraged products. Certain hedging techniques include matched combinations that neutralize or offset individual risks such as merger arbitrage, long/short equity, convertible bond arbitrage and fixed-income arbitrage. Leveraged products are those that employ financial derivatives and debt to try to achieve a multiple (for example two or three times) of the return or inverse return of a stated index or benchmark over the course of a single day. Inverse products utilize short selling, derivatives trading, and other leveraged investment techniques, such as futures trading to achieve their objectives, mainly to track the inverse of their benchmarks. As with all investments, there is no assurance that any investment strategies will achieve their objectives or protect against losses.
Neither Envestnet, Envestnet|PMC™ nor its representatives render tax, accounting or legal advice. Any tax statements contained herein are not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Taxpayers should always seek advice based on their own particular circumstances from an independent tax advisor.
© 2017 Envestnet. All rights reserved.