On June 16, Amazon (AMZN) agreed to purchase Whole Foods (WFM) for $13.7B. The announced purchase has led to many questions regarding Amazon’s place in the grocery market and what it means for competitors. This transaction is simply the most recent example of a major disruption in the overall retail market, which has had a large effect on several stocks in the consumer sector. In today’s market reflection, we will examine what has occurred in the consumer landscape and the ramifications for investors.

In measuring total retail sales, the general trend has been relatively healthy. As seen in the chart below, retail sales have been steadily growing over the last 5 years, ranging between 1.5% to over 6% year over year growth. The data reflects that US consumers are still active and spending money.

The change that has occurred, and has had a massive effect on consumer stocks, is the transition of retail sales from physical stores to online. The below chart reflects online retail growth (red bar) compared to total retail growth (pink bar). Online retail is growing over 7x faster than total retail, and that number has accelerated over the last 3 years.

This trend has been most prevalent within nonstore (or online) retailers versus large scale department stores. Per the chart below, sales at US department stores have fallen for 23 straight months while nonstore retailers have continued to grow and gain share.

The effect of this share shift has been reflected in stock prices of retail providers. The below data reflects stock performance of several large retailers from 2014 to present. Not surprisingly, the ecommerce leader (Amazon) and home improvement retailers (Home Depot, Lowe’s) have been the best performers over the last 3 years. On the other side, physical based retailers in apparel and home goods (Kohl’s, JC Penney, Macy’s, Sears) have been the worst performers.

This share shift has not only had an impact on large scale retailers, but have included smaller mall-based retail as well. Companies like Gymboree, Payless ShoeSource, and Gander Mountain have all filed for bankruptcy this year, and have announced initiatives to close several hundred stores as part of their restructuring plans. These store closures have not only manifested itself in the share price of retail companies, but has had a negative effect on the real estate investment trusts (REITs) that lease mall space to these retailers. The data below reflects the underperformance of two largest mall based REIT providers (SPG and GGP) versus the broad REIT universe (VNQ).

For our portfolios, our asset selection in the retail space is centered on finding opportunity in the retail markets and avoiding, or selling, stocks that we believe will continue to suffer as a result of changes in the retail landscape. In that regard, we continue to hold companies like Simon Property Group (SPG) and Kohl’s (KSS), as we believe solid operating fundamentals and cash flow generation are not accurately reflected in current stock valuations. Conversely, we recently removed Target (TGT) from our portfolio due to our lack of conviction in their ability to turn around the weakening fundamentals of the company against stiffening competition.
As with any significant changes to market or industry dynamics, it is important to assess the risks of companies within the space to determine opportunity versus avoidance. At Nevada Retirement Planners, we believe that proper due diligence and active management allows us to take advantage of opportunities the market provides in the various portfolios we have available.

To expand on these Market Reflections or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222

Real income from investments has been tough to find for the last few years. With banks currently offering just 0.15% for a six month certificate of deposit, ten year U.S. Treasuries paying 2.2% and longer term investment grade corporate bonds yielding 4%, the traditional choices of income producing sources are unappealing.

We offer a strategy for meaningful yield generated across multiple asset classes. The Absolute Yield portfolio invests in exchange traded funds (ETFs) to gain exposure across these asset classes, both in the U.S. and globally. ETFs provide diversification to reduce risk. The Absolute Yield portfolio’s volatility since inception in 2013 has been about 60% of the U.S. stock market.

What are these multiple asset classes? We use eight to ten stock, fixed income and alternative asset classes which tend to be non-correlated. No one class exceeds 20% of the portfolio. At this time, these asset classes are:

• Common Stocks: global companies that pay high dividends
• Business Development Companies: management companies that provide loans to smaller firms in their early stages of development, similar to venture capital firms
• Real Estate Investment Trusts (REITs): firms that generate income from real estate rentals and transactions
• Mortgage REITs: firms that derive income from investments in mortgages and mortgage debt
• Preferred Stocks: hybrids between stocks and bonds, which receive dividends before common stock owners
• Master Limited Partnerships: natural resource firms paying income from profits in developing, extracting, transporting and selling these resources
• U.S. High Yield Bonds: bonds rated below investment grade from U.S. based companies
• International/Emerging High Yield Bonds: bonds from countries which tend to have lower credit ratings due to increased economic and/or political risk
• Senior Bank Loans: floating rate bank loans to non-investment grade companies, collateralized by corporate assets

The yields on the various asset classes are illustrated in the chart below:

At the end of May, the Absolute Yield portfolio provided a yield of 5.95%.

As an actively managed portfolio, the Absolute Yield portfolio is constantly monitored by our investment management team for attractive opportunities to maximize yield with below average total volatility.

This is a proven strategy for investors willing to diversify from customary sources of fixed income. It is designed for people who can accept short term market fluctuations in an effort to boost income while seeking modest growth in the underlying assets over a full market cycle.

As always, it is important to keep your focus on the long term investment goals to which you are committed. Know your risk tolerance score, and continue to incorporate that into your investment program. Let time work on your behalf.

To expand on these Market Reflections or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222

Market prices are a reflection of all things known and the collective wisdom of all things expected to be known. The market constantly evaluates all factors, be they fundamental, technical or political.

Corporate earnings is an example of a fundamental factor with long-term market price implications. The market pays very close attention to expected earnings and diligently compares them to actual results when reported. This dynamic plays out with every public company’s quarterly earnings release. Did they meet, beat or fall short of expectations and what is their sales and profit guidance for future quarters? Macro factors such as economic growth, employment, retail sales and consumer confidence can influence market prices. These economic fundamentals are also important components to long-term stock price movements.

In addition to fundamentals, world and political headlines can also impact price movements. These usually result in shorter-term price movements. In the recent past we saw this play out with the U.S. election night and the British vote to leave the European Union last summer.

The struggle between headlines and bottom lines usually works itself out whereby fundamentals carry the day. Although, there are times in the battle where headlines take control. This was briefly evident in May as headlines began to weigh on the market. You have experienced this sensationalism before: “Stock, Dollar Fall Amid Turmoil in Washington”, “Dow Falls More Than 200 Points Following News of Comey Memo”, and “Fed’s Rate-Hike Odds Tumble After Washington Chaos Hits Bond Market”. International markets are not immune to headline risk as May gave us, “Brazil Markets Sink, Triggering Circuit Breaker on Fresh Crisis.” As an investor, your best defense is to tone down the headline noise and focus on the fundamentals. Put another way, don’t let the headlines of the day stir your financial emotions. Instead, pay attention to the evolution of the chart below and let this be your guiding light.

Despite all the political noise the markets not only survived another month, but reached new highs in the process. Best Buy and Costco proved retail is not dead yet, and Amazon reached an amazing $1,000 per share price. The NASDAQ 100, S&P 500 and the Dow Jones Industrial Average all hit new records even after the media’s best attempt to scare investors to death after just one down day. At the end of the month it was the international developed stock group taking home the first place trophy with a return of 3.67% followed closely by emerging market stocks and the NASDAQ Composite with monthly returns of 2.96% and 2.67%, respectively. We welcome June with open arms.

The bond market was the beneficiary of a “flight to quality” trade in May. Maybe it should be referred to as a “fright-to-quality” trade. This happens from time to time as investors seek the safe haven of U.S. Treasuries at a time when volatility picks up in the stock market. During May, the 10-year US Treasury Note traded in a tight range of 2.21% to 2.42% and finished the month at the low yield of 2.21%. The Federal Reserve is in a wait-and-see mode and may stay on the sidelines in June.

The bond market is in the process of handicapping the extent of President Trump’s economic agenda and the Federal Reserve’s future actions. Entering the year, it appeared that tax cuts, infrastructure, border wall and job initiatives were a safe call to be fully implemented. If so, higher economic growth and Fed rate hikes were a foregone conclusion. If the economic agenda gets watered down, rates may stay lower for longer. We are seeing the bond market coming to grips with this possibility.

Take all the sensationalized headlines with a grain of salt and keep your focus on both the macro and micro fundamentals. It is good to keep yourself abreast of national and international developments, just don’t let all those headlines distract you from your bottom line.
MARKETS BY THE NUMBERS:

To expand on these Market Commentaries or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222