The chief market strategist at a $1.3 trillion investment firm breaks down Amazon’s ‘disruptive’ Whole Foods deal

Quincy Krosby BTV“What will Amazon do with all this new real estate?”Bloomberg TV

Amazon’s blockbuster acquisition of Whole Foods was a $13.7 billion surprise.

While research analysts across Wall Street quickly weighed in with takes on possible rationales and corporate synergies, there’s no denying the market found itself upended, at least temporarily.

Investors quickly piled into shares of both the target and acquirer while hitting the escape valve for basically all other grocery retailers. It was a classic example of react now, ask questions later.

And Quincy Krosby, chief market strategist at Prudential Financial, which oversees about $1.3 trillion, certainly has plenty of questions. To her, the Amazon acquisition will have wide-reached effects spanning sectors outside of retail.

In an interview with Business Insider, Krosby discussed the acquisition now that she’s had a few days to digest it, while also offering thoughts on corporate earnings, the broader tech sector, and the Trump trade.

This interview has been edited for clarity and length.

Joe Ciolli: Amazon’s acquisition of Whole Foods has already had a far-reaching effect. What do you anticipate will be the biggest implications of the deal?

Quincy Krosby: It portends more deals. This is a disruptive move for the market — it seems as if it was a surprise. The rest of the retailers are getting nailed across the board, because the question becomes, what will Amazon do with all this new real estate? It’s not just going to sit there as a food store. You’d expect more competition, and more alignments.

The space now is going to have to respond to what this portends across the board. It’s not just about Amazon selling food — it’s about what they do with the real estate in these markets.

The question becomes, does Amazon now go after other retailers in an attempt to carve out more space in other demographic areas? The market is indicating that Amazon has moved in and stirred up worry for other retailers. Competition is heating up. Margins are narrower. It’s going to further disrupt and already tight-margin industry.

Is their model going to be stronger than the ones you’ve seen from other retailers that have placed food in their offerings — like Walmart and Target? The market is going to have to look beyond just this particular marriage.

Ciolli: The frenzy in retail trading after the Amazon/Whole Foods deal just added to the turbulence we’ve seen in the market lately, particularly in tech stocks. What do you make of that?

Krosby: The tech strength was largely driven by momentum buyers. You saw the role of algorithms and ETFs — the sell and ask questions later approach.

You’re seeing a rotation into other sectors. It isn’t as if the whole market is getting nailed at the same time. Investors are taking some profit and moving into something else. That suggests the market could continue to grind higher.

In terms of seasonality, this is probably the weakest period for the market. We’re expecting the market to behave perhaps a little more defensively as we head into the fall.

Ciolli: There’s a battle raging over whether tech stocks are overvalued. What’s your view on the sector?

Krosby: Companies in other industries utilizing tech to better themselves will never go away. Technology has embedded itself in every type of commerce.

What the FANG stocks represent is the ability for these companies to create products that no one ever thought could exist. But the broader tech sector represents the broader use of technology across every other sector.

As we came out of the tech bubble crash, we entered a period where technology companies became a safe haven, because they held so much cash. During 2008 and 2009, they were moving into the sector because it had money to withstand the downturn.

Really, tech is becoming almost anything we want it to be, depending on the backdrop of the market or economy. Therefore, tech will never go away. There are subsectors that will look more attractive on a valuation basis. But you’re going to continue to see M&A in technology, which is going to serve as a catalyst.

Ciolli: What’s your take on the impact of earnings growth? Is it helping keep the bull market afloat right now, as advertised?

Krosby: Yes, and revenue growth in particular has been strong. That’s giving investors comfort that demand is picking up, not just in the US, but globally. As we go into second-quarter earnings season, they’ll be watching closely for whether revenue growth continues to expand.

There’s a major tug-of-war happening in this market. Economic data is slowing, and in that camp the view is that you’re going to begin to see earnings slow down. The other side of it is people who see economic data as mixed, but are encouraged by manufacturing reports. They still see earnings growth as a catalyst for the market continuing to grind higher, albeit with a natural sell-off sometime this summer.

Ciolli: What about the Trump trade? Is that totally dead?

Krosby: When we came out of the election, the 10-year yield climbed. But that got wiped out as questions mounted over the timing and viability of the agenda.

The market is moving based on fundamentals. If you do see a move in terms of the Trump agenda, there’s no question that it’ll come well before the 2018 elections. If you don’t get tax reforms, you’ll get tax cuts. That’s also helpful for the market. Right now it doesn’t look like the market is expecting that. Therefore, if there’s any sign that it’ll actually materialize, it could be a major catalyst for the market moving ahead.

Ciolli: Do you think the Fed was warranted in the surprisingly hawkish stance they adopted last week?

Krosby: Even though the market instinctively questioned the hawkishness that Yellen conveyed, the fact is that she will slow down and maybe even not give us a rate hike if economic data pulls back. But she’s made it clear in so many ways that, if the market sells off, don’t think I’m going to hold back on rate hikes.

She’s said in the past that she thinks the market is frothy and possibly overvalued. She’s telegraphed to the market that a sell-off won’t hold her back. She wants to leave the Fed with the beginning of the unwind. She wants to fill the toolkit and be ready, so when the economy does start to slow down, the Fed can use conventional monetary policy to help it.

Ciolli: What are your specific sector calls? What about specific companies?

Krosby: Look at energy. Look at the use of technology within the energy sector, when all prices started to collapse. What happened was, it forced companies to try and use any sort of technological gain to get more at less cost.

Healthcare has been doing very well. Small- and mid-cap healthcare has actually outperformed its large-cap brethren.

There are now parts of consumer discretionary that are attractive. Look at some of the casual dining stocks that got hammered. You still have gasoline prices that are attractive, and the employment landscape is still constructive.

If you’re worried about the economy, and you’re part of the camp that believes it will continue to drip lower, you might want to hedge your portfolio with utilities. That’s become the consummate bond surrogate. And while this is one that’s been up for a while, financials could still see some strength. The question is whether you’re going to see more deregulation for banks.

Ciolli: More philosophically, what’s the best piece of advice you can give to an investor just starting out right now?

Krosby: You invest and trade in the market you have, not in the one you want. In other words, don’t envelop yourself in being bullish or bearish. Just be pragmatic and opportunistic. Take advantage of the market you have.

It doesn’t take much to change the tone of the market — comments from Fed officials, from Washington, or from the CEO of a major company. When you have a big event in the market that casues a quick sell-off, that’s usually a buying opportunity.

But what you do worry about is the business cycle. When that starts to slow down, you have to respect it.

The last piece of advice is: respect what the credit markets are telling you.

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