It’s said that timing is everything. And that’s true. But really, it’s bigger than that. Time – itself – is everything, and truly the world’s best companies are finding ways to give you more of it.
We got pretty lucky last month in our feature of Amazon (timing is everything!). Possibly the most buzzworthy news of June was Amazon’s bid on upscale grocery chain Whole Foods. Amazon continues to disrupt the entire retail complex. There’s a lot of speculation around Amazon’s strategy with the food chain, but there’s no doubt that the other companies in the grocery space are shaking in their boots. Amazon seeks to completely change how we shop, and their recent launch of Prime Wardrobe is proof of it. Shoppers will be able to try before they buy and only pay for the items they keep. Effortless consumerism.
Let’s take a quick look at the most important economic news and market events, and then return to this focus on time and recent developments in the tech sector.
Economic data continues on in a somewhat mixed fashion. The US Bureau of Labor and Statistics reported that the unemployment rate fell to 4.3%, the lowest it has been in 16 years. The broader U-6 reading (which measures both the un and under-employed) dropped to 8.4%. At the beginning of 2009 U-6 was at 17%. The really low unemployment data points to an economy that should be heating up. However, inflation data is telling a different story. For the third month in a row, year-over-year inflation has disappointed, coming in at only 1.7% in the most recent release. Various manufacturing data are giving mixed signals as well —some improving slightly, some falling slightly. However the data skews to the positive overall. One US state worth mentioning is Illinois, which found its credit rating slashed to “junk” status recently. Political gridlock there is holding back any signs of progress. Lastly, consumer sentiment spent 11 months of 2016 in the low 90s. Half way into 2017, consumer sentiment has hovered around 97 (from the Bureau of Labor and Statistics). What does this mean? Good consumer numbers mean people are feeling okay and likely to make purchases.
The “atta-boys” have to go to Japan and Europe this month. Europe is growing above potential; Japan is growing way above potential; and the emerging markets, including China, are growing at potential. The losers for the month include Qatar and Argentina. Most of Qatar’s regional neighbors are cutting the country off as punishment for supporting various terrorist groups. And Argentina got the cold shoulder from the MSCI when they passed on allowing Argentinian stocks back into their Emerging Market Index. Elsewhere, China’s mainland shares, did make the cut (finally) and will be included in the MSCI Emerging Markets Index, a nod of legitimacy. Some economists have expressed concerns about China’s debt-fueled expansion, but just about the worst economic story in the news nowadays has to be the debacle that is Venezuela. The nation finds itself dealing with drastic food shortages, riots, and political unrest. Recently, grenades were dropped on a capitol building from a stolen helicopter commandeered by a movie star action hero. You can’t make this stuff up, folks.
The S&P 500 bounced between 2420 and 2450 for nearly the entire month of June, and more specifically it spent about 80% of the month’s trading days between 2430 and 2440. Financial stocks advanced on two events: 1) the Fed’s June rate hike; and 2) all of the big banks passed the Fed’s stress tests. Optimism about the current healthcare legislation sent healthcare stocks higher, as well. The tech sector was up nearly 19% year-to-date, before a small retreat that started mid-month. Lastly, the energy sector has again lost ground and is down nearly 14% YTD. However, FactSet projects that S&P 500 earnings growth will be greatly aided by the energy sector over the second half of the year.
Looking ahead, the earnings outlook remains positive. Consumer spending is expected to pick up in the second half of 2017, and any material progress on the tax reform effort would solidify optimism. Understand that if a tax bill is passed that cuts corporate taxes, it would instantly translate to higher bottom line earnings and probably to higher stock prices, or at least the higher earnings would help justify stock prices at current levels.
Lastly, the major stock indices continue to log new all-time highs, and investors have been somewhat spoiled by extraordinarily low volatility. But the markets can be fickle. Small pull backs are normal, and the past few 10%-14% corrections haven’t last all that long. The environment has rewarded risk assets, and it seems likely to continue, however volatility is likely to increase.
The US Federal Reserve approved a second rate hike for 2017, and now the Fed Funds Rate range stands at 1.00-1.25%. Fed Chair Janet Yellen spoke following the announcement, and stated that the Fed would begin to reduce the size of its balance sheet later this year. The plan is for this “reverse QE” process to start small and slowly and then increase in size on a monthly basis. Abroad, ECB President Mario Draghi spoke at a forum in Portugal, stating “The threat of deflation is gone and reflationary forces are at play [in the Eurozone].” However, inflation data is coming in weaker than anticipated, similar to what we’re seeing in the US. Japan’s negative interest rate policy remains intact as that country continues with its version of QE.
In May, OPEC voted to continue its output production cap, and YTD compliance to the agreement is a high 96%. However, oil prices have plummeted, and the commodity finds itself in its sixth bear market in the past four years. US active oil rig counts have gone up ever since oil prices recovered from the lows of 2016. Basically, US drillers are efficient enough to pump and make money, even at these prices, which keeps the supply glut story intact.
While not entirely a traditional commodity, two of the major cryptocurrencies spiked and then experienced steep price drops in June. Those would be Bitcoin and Ethereum. The “b” word (bubble) is starting to pop up more in conversation lately, but the label applies to the cryptos more than anything else that comes to mind, at the moment. Look before you leap!
The most amazing thing about what Amazon is doing is that they are saving everyone so much time. It’s invaluable. Buy your mother-in-law’s birthday gift from your phone, while waiting for a haircut. Do your grocery shopping from your phone while the pasta for dinner is boiling. Update your wardrobe between commercial breaks, or, for more and more of us, during Hulu and YouTube ads. Not to mention all of the other business lines Amazon is involved in (shipping, the cloud, entertainment, and even space exploration). But what I really love the most about Amazon is the time I get back.
There was a second buzzworthy story in June, and it comes from a Bloomberg interview with Apple CEO Tim Cook. Apple has long been rumored to be exploring self-driving cars, and in the interview Cook revealed that Apple is focused on autonomous systems, and at the center would be technology to run self-driving vehicles. He called it “the mother of all AI (artificial intelligence) projects… probably one of the most difficult AI projects to work on.” Think about all of the time we spend in cars. Traffic, ugh. What a waste of human existence.
Several big players in the auto and tech industries are testing self-driving cars, including Waymo (owned by Alphabet, which owns Google), Nissan, BMW, Tesla, Mercedes, Honda, Baidu (who some call the Chinese Google), Daimler and Uber. These companies are developing technologies that will support a self-driving vehicle with very little human interaction. Here’s a great chart that breaks down the various levels of self-driving technology.
Level 2 is similar to an advanced cruise control or autopilot system, which is what you find on some Teslas, but the driver has to remain alert. Rumors suggest that Tesla and GM could have Level 3 and/or 4 vehicles on the road as soon as 2018, and a lot of major names could be on the road with Level 4-5 vehicles as early as 2020.
Apple started its super-secret “Project Titan” back in 2014. Initially, Apple wanted to build its own car, but they recently revised that goal to focus on the technology. And it’s coming soon. For Apple, it’s a fascinating development as self-driving cars are described as fitting in their “autonomous system,” whatever that might mean. Don’t forget that all of the hundreds of millions of dollars of investment in research and development are funded by Apple’s most famous product and cash cow which recently turned 10 years old. Happy Birthday iPhone!
So how does life change when you get all of that drive time back? What happens to parking garages? Could your car go work for you after it drops you off at your destination? What happens when a self-driving car gets into a wreck? Will you even need a car? We may not get answers to these questions in 2018 or 2020, but time will tell.