Disruption: Stay diversified to not be left behind
The pace of disruption across our world keeps accelerating. One of the first sectors to feel the impact of online commerce was the retail sector, and that impact has grown to be more and more profound. As Amazon celebrates its 20th anniversary of going public this month, we recognize that a whole generation of consumers has come of age always having an online shopping alternative.
This past Friday, retail sales were reported for the month of April, and sales rose by 0.4% from March.1 Online sales now represent 10% of total sales, but a full one-third of the growth in total retail sales.2 Traditional department stores like J.C. Penney and Macy’s are really struggling, as their shares are down 44% and 36%, respectively, so far this year.34
Whether or not these once-leading retail names will find a new course that can allow them to find new areas of growth is not really a concern for our investment program; this is why our approach to investing is full diversification. As one specific industry sector or subsector faces great challenges, the areas that are succeeding take over. Investing a core portion of our equity program in broad index or index-like strategies that encompass all sectors naturally allows those sectors and firms that are increasing their market value to have more weight in the program.
As Amazon has grown into the dominant retailer that it is, its weight in the index has grown all the way along. Likewise, as companies like Macy’s and J.C. Penney see their values shrink, their impact on the index is less and less. If these retailers ultimately turn things around, great — the investment program will benefit from their increase in market value. In other words, our program is designed to not have to decide who will win or lose in an ever-changing world; rather, it is designed to capture the returns of the great winners and let the companies that ultimately fall away not have a noticeable impact.
Transition to more normal volatility?
The resurgence of global growth has boosted equity markets 8% so far this year.5 In the U.S., earnings for the first quarter rose almost 13%, the highest rate in five years.6 Up until yesterday’s 1.8%-drop in the S&P 500, we have seen a very stable market.7 We have the fewest 1%-daily moves, up or down, so far this year since 1965.8 So after an extended period of low volatility, getting back to normal may feel pretty uneasy.
Markets focus on earnings and what to pay for those earnings, based on the confidence in the outlook and interest rates. If the outlook gets clouded by weaker economic data or policy uncertainty, expect increased volatility similar to yesterday’s decline. As Washington gets more wrapped up in administration controversies and investigations, the concern is that policy initiatives like tax reform, regulatory changes and infrastructure investment will get pushed out later or not materialize at all. Investigations do take a long time and maybe policymaking can get back on track as they proceed. Will the political fireworks impact consumer spending or business investment? We’ll be watching, of course.
Again, we stay diversified across equities and fixed income, domestically and internationally, and across various investment styles to reap rewards and control risks wherever they may lie. Diversification works — it really does.
