May 14, 2016
Rise of the Machines
Stocks thrashed about again this week as algorithms debated trading levels. Increasingly, market movements occur in reaction to each other rather than as a consequence of analytical rigor. According to a study on the topic published by Morton Glantz and Robert Kissell, the total daily trade volume generated by traditional asset managers (mutual funds, pension funds, etc.) fell from 40% in 2002 to about 20% in 2012, while daily trade volume of algorithmic traders rose from 1% to 30%. If you lump into that number hedge fund arbitrageurs and market makers, the total trading volume jumps up over 70%. We can debate the accuracy of the figures, but there is no debate over the trend. On Wall Street, the machines are rising…but what spooked the markets this week was their ascent on Main Street.
Traditional retail stocks bled red this week as dismal earnings from Macy’s, Fossil, Gap and Kohl’s blended into an epitaph for old economy purveyors. The rise of e-tailing has clearly changed consumer behavior, but the magnitude of that migration has become financially undeniable for investors. Macy’s, Sears and a host of others have seen share prices clipped 50%+ over the last year as Wall Street accepts the inevitability of the move from Main Street to e-Street. Consumers can click and receive with astounding speed (free, same day deliveries). High resolution displays nearly match reality and competitive discounting means that today’s online shopper can get exactly what they want, exactly when they want it, at a fraction of the cost. In 2000, online consumer spending accounted for less than 1% of all retail sales. Today, online spending accounts for 7% of total retail sales. In China, online spending accounts for almost 12% of retail sales, and as shown in this week’s graphic, the growth trends globally are ubiquitous. With overall market share numbers globally for e-tailers in the single digits, there is plenty of room for expansion and disruption. Amazon alone accounts for 25% of retail sales growth in the US, and just recently surpassed Wal-Mart as America’s largest retailer. Over the past 24 months, Amazon’s stock price has risen 141% while Wal-Mart’s has fallen 16%. Advantage, machine.
Bottom Line: Markets bounced around this week without true conviction. As we discussed last week, we expect this to continue until we receive more clarity on the election. What captured imagination this week was the collapse in traditional retailer economics. This led to a broader and very interesting conversation over the rise of the Millennials and their fusion with technology. In many sectors, technological disruption has reached critical mass. For all business owners (us included), the pressure to evolve and innovate has never been greater, and the stakes approach winner take all. The disparity between Amazon and Macy’s exists or will exist in nearly every industry. That recognition of economy wide “Amazonization” led market participants to pause and contemplate commerce trends in a very apprehensive way this week. Given their size and influence, proper contemplation may require crawling inside the mind of a Millennial. Want to know how Millennial you are? Click Here to find out.
Have a Great Weekend!
David S. Waddell
CEO, Chief Investment Strategist
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