Welcome to the Jungle

Let’s quickly touch on economic and capital markets news and then move to a feature on Amazon, which just celebrated its 20 year anniversary as a publicly listed company last month.

US ECONOMY

The U.S. economy is growing, but not at a rate strong enough to please policy makers. GDP growth in the first quarter was 1.2%, which is markedly lower than the 2.1% rate recorded in last year’s fourth quarter. However, there’s good news too. Earnings by the U.S.’s largest companies, as represented by the S&P 500, climbed at their fastest pace in nearly six years during the first quarter. Also, the unemployment rate in the U.S. slipped to 4.4% in May, the lowest it’s been in 10 years.

INTERNATIONAL

Economic news from overseas varied depending on where it came from.  Improving economic data in Europe pushed stocks to their highest level in nearly two years. French voters elected Emmanuel Macron – a political outsider, but a Centrist – as president, which helped keep a lid on volatility on the Continent. Macron is a supporter of greater European integration and a continuance of the EU experiment. In some of the world’s emerging markets, things weren’t as calm. Brazil’s stock index plunged 8.8% in mid-May following reports that the nation’s president, Michel Temer, was being investigated in connection with alleged bribery. Moody’s cut its credit rating of China’s government debt in May, citing an increase in domestic debt and the outlook for weaker economic growth. It was the first time in 27 years the rating service has downgraded Chinese debt.

STOCKS

The U.S. stock market was business as usual for the first half of May. Market prices hit new highs, and market volatility remained near multi-decade lows. At one point, the S&P 500 index had moved up or down less than 0.5% for 15 consecutive trading sessions, the longest such streak since 1969. A survey of consumer sentiment at the time showed it was about the same as the feel-good days when Neil Armstrong and Buzz Aldrin were walking on the moon. Good times, indeed. Then on May 17th, everything changed in a flash. Markets were roiled by news that President Trump’s economic agenda would face fresh obstacles. U.S. stocks tumbled 1.8%, their biggest drop in more than 8 months. The tech-heavy NASDAQ plunged 2.6%. Financial stocks fell 3.0%. The flight to quality was on: U.S. bond prices posted their biggest one-day rally in nearly a year, sending bond yields lower. However, as quickly as the stock market soured, it regained its footing. The S&P 500 posted seven daily gains in a row and set record highs before May drew to a close. So did the NASDAQ. The CBOE Volatility Index dropped about 19% during the rally. The good times look to be back … for now.

CENTRAL BANKS

Early in May, the U.S. Federal Reserve Board (the Fed) voted to keep interest rates unchanged and said that recent economic weakness was likely temporary. The Fed last lifted rates in March and its next meeting is in June, when most analysts expect the Fed to lift rates again. A strong USD is less of an excuse than it once was for Fed members to pass on a June hike. The USD rallied verses a basket of major foreign currencies in the wake of the U.S. election last November but has since given back all those post-election gains. US central bank policy continues to diverge from other major central banks around the world. China’s central bank recently pumped additional cash into the nation’s financial system in an attempt to restore investor confidence following a recent government campaign to crack down on speculative investing fueled by debt. Additionally, the ECB has yet to curtail its stimulative monetary policies.

COMMODITIES

A global surplus of oil weighed on prices in May, sending U.S. crude prices to below $46 a barrel – its lowest level in five months. OPEC’s consortium of major oil-exporting countries continues to curb production to lift prices, but those higher prices are met by increased output by U.S. producers, which tends to drive the price of oil right back down.

Welcome to the Jungle

In 1987, bad boy American rock band Guns N’ Roses hit the jackpot when their debut album “Appetite for Destruction” soared to number one on the Billboard charts. It’s still the best-selling debut album of all time in the U.S. and includes the hit single “Welcome to the Jungle,” a song touted by Rolling Stone magazine as one of the greatest rock anthems of all-time. The song’s lyrics include lines like “welcome to the jungle … watch it bring you to your knees … [and] it gets worse here every day.”

Amazon’s (NASDAQ: AMZN) founder, Jeff Bezos claims he changed the name of what is now America’s most valuable retailer from “Cadabra” to “Amazon” because he wanted to go with something “exotic and different.” But maybe even back then in the mid-1990s, he had Guns N’ Roses’ tough song lyrics swirling around in his head. Maybe he was already setting his sights on making Amazon the internet giant that would fundamentally reshape American retail, making it a jungle to navigate for America’s biggest names – an environment that would literally bring scores of retailers to their knees. To be sure, for the likes of Sears, Macy’s, Circuit City and even Walmart, things have absolutely been getting “worse here every day” since Amazon hit town.

Amazon celebrated its 20th-anniversary last month. It debuted as a publicly traded stock on May 15, 1997, at $18 per share. On May 15, 2017, it traded at $960 per share. Amazon has split its shares three times over the years – once in 1998, and twice in 1999. If it hadn’t, but all else had stayed the same, a share of AMZN would go for $12,000 now. In two decades, the S&P 500 has gained +190% – not bad. Amazon has advanced +55,550% over the same time period, pushing Amazon’s market value to more than $478 billion, double that of the world’s biggest traditional retailer, Walmart, and more than 15 times the size of Target. Let that sink in for a moment …

Jeff Bezos founded Amazon in 1994, literally out of his garage in Seattle after quitting his job in New York City and moving out to the Pacific Northwest. He wanted to be where the tech culture action was, and he knew in his gut that online retailing was going to be huge. After carefully mulling what products could be sold online, he settled on books as the ideal item to start with. The idea was genius. Since books have barely changed over the centuries, Bezos recognized that ordering a book over the internet would be an easy leap for consumers. But books were just the beginning of a strategy to win the e-commerce game one retail category at a time. Things were lean in the early days. Bezos and his wife had to avoid using their toaster and blow-dryer at times because using them could trip a fuse and short out the computer servers in the garage. However, within just a few months, sales grew exponentially, and that sales growth allowed Amazon to build scale, which it quickly used to diversify into other consumer items including DVDs, music, video games, electronics, and clothing. In 1999, just five years after starting Amazon, Bezos was named Time magazine’s “Person of the Year,” due primarily to Amazon’s success in making online shopping mainstream. But Bezos was only getting started. In the years that followed, Amazon rolled out its own products like its Fire stick, the Kindle, and most recently the Echo and the Echo Look which work in conjunction with Amazon’s Alexa, its “intelligent personal assistant.” The Kindle only changed the way many people read books but how they buy them as well – directly from a device with the content delivered wirelessly. Many expect that the Echo / Alexa tag team will be as transformative as consumers embrace buying products via voice command as just an everyday thing in time.

However, Amazon’s success is based on far more than just its ability to deliver products to your door at ultra-competitive prices, or even its homegrown innovations. Amazon’s online platform allows the company to gather a wealth of information about its customers, which enables it to leverage that knowledge to become better and better at being a retailer. Amazon knows more about its customers than any local shop could imagine. The company’s proprietary algorithms track what users view and buy, and who bought similar items. This knowledge becomes more precise the more people join and the more precise it becomes, the more people come back to shop.

Scott Galloway, a Marketing professor at New York University predicts that within a few years Amazon’s knowledge about who you are as a consumer based on artificial intelligence (AI), your purchase history, your credit card history, and your use of the Amazon devices you will have around your house will allow Amazon to propose being your only retailer. Amazon may be contemplating a set up in which they just send you two boxes twice a week – one that contains the items they think you need, and the other box will be empty for your use in sending back what you don’t want. Over time, the process will become more fine-tuned as Amazon learns and recalibrates their deliveries based on what you keep, order more of, and send back. It’s a little scary … sort of.

One can only wonder what the next 20 years holds for Amazon, and for its customers. The company that first offered books for cheap online may one day become most every American’s default retail alternative. Amazon’s top brass recently hosted a series of meetings at their Seattle headquarters with executives from several of America’s marquee brands, including General Mills and Mondelez International (formerly Kraft Foods). In the meetings, Amazon encouraged those visiting executives to rethink how they visualize the supply-chain and packaging side of their businesses. Amazon wants them to focus on how to stock shelves in Amazon warehouses with their goods instead of distributing goods to their big-box retailer clients. Essentially, Amazon is looking to completely upend the relationships between brands and brick and mortar stores. It’s a brilliant strategy. Amazon has more than 300 million customers and can produce its own products if a company doesn’t want to work with them, so it’s likely that we’ll see these major brands in the food and packaged goods market comply. Like Guns N’ Roses lead singer Axle Rose likes to belt out: “Welcome to the jungle, baby.”