6/16/17 – Amazon Shakes Up Grocery Sector

Amazon Throws Wrench in Grocery Sector, Stocks Slightly Higher

Stocks moved slightly higher in a busy news week. The Fed increased interest rates as expected on Wednesday. The big news, however, came out today as Amazon announced it agreed to acquire upscale grocery chain Whole Foods. On the week, the Dow gained 0.5% while the S&P 500 increased 0.1%.

Grocery Sector – Amazon made waves this morning announcing it agreed to buy Whole Foods for $13.7 billion. Amazon has slowly been opening some retail stores and this will immediately give the company ~450 stores nationwide. The reaction for competing grocers was severe. SuperValu closed down more than 14% while Kroger, Walmart, Target, and Costco all declined between 5-10%. The sell-off was driven by fears of what Amazon will do to grocery profits in an industry that already operates on thin margins.

Amazon stock increased on the news. Typically the acquiring company will see its stock decline after a merger announcement, but Amazon increased 2.5% today. That equates to a gain in total value of over $11 billion. Amazon essentially paid for the Whole Foods acquisition just with the move in it stock.

I think the down move in the grocery sector seems overdone, especially for Walmart and Costco. Costco makes most of its money from membership fees. I don’t see Amazon owning Whole Foods changing that dynamic. Walmart has a very different customer base from Whole Foods and is already the low cost provider on essentially everything it sells. That said, Amazon will likely put margin pressure on grocery stores, many of whom operate on very thin profit margins already.

Federal Reserve – As expected the Fed raised short-term interest rates this week by 0.25%. The new target range for the Fed Funds rate is 1.00 – 1.25%. While the Fed increased short-term rates, longer-term rates continue to move lower. This is called a flattening of the yield curve and often happens when the bond market expects economic growth to slow. I’ve written about this over the last few weeks and it remains interesting to me the difference we’re seeing in the bond market versus the stock market. The bond market is telling a much more negative story about future economic growth than the stock market. The bond market is notoriously pessimistic, but it is a trend that is worth following.

Oil kept moving lower this week, decreasing another 2.6% to close at $44.70/barrel. The yield on the 10-yr Treasury moved lower, closing at 2.16% from 2.20% a week ago. The average rate on a 30-yr fixed rate moved higher this week, to 3.91% from 3.89% last week.

Close Weekly YTD
Dow Jones 21,384.28 0.5% 8.2%
S&P 500 2,433.15 0.1% 8.7%
Oil 44.70 (2.6%) (17.1%)
10-yr Treasury (∆ in bps) 2.16 (4) (29)

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