Why Amazon (AMZN) Has Months Of Declines Ahead

Amazon.com, Inc. (NASDAQ: AMZN)

Amazon, like most stocks in the US market at the moment is struggling. When it comes to stocks like Amazon however, we can expect for the declines to continue for quite some time. Today, we’ll talk about what’s causing the declines as well as why the declines are likely to continue for a while.

Why AMZN Is Struggling

All in all, Amazon isn’t the only stock in the market that’s struggling at the moment. In fact, the entire US market is struggling. We’ll get into why AMZN is uniquely bad to have in your portfolio at the moment later, but for now, let’s talk about why the market as a whole is having such a hard time.

The declines we’re seeing revolve around the Federal Reserve. Currently, the Federal Reserve’s interest rate, known as the Federal Funds rate is at a record low 0.25%. The record low rate currently means that consumers are spending less money on interest, leaving more money available for spending that would benefit corporate earnings and stimulate the economy. The reason the rate is so low at the moment is relatively simple to understand. During the depths of the economic crisis of 2008 and 2009, the Federal Reserve reduced its interest rate in an attempt to stimulate the economy. However, when they did this, they also made it clear that low rates simply couldn’t last forever. When the US economy built to a strong enough point to withstand a rate hike, the Fed would work to start increasing its rate.

At the moment, economic conditions in the United States are looking relatively positive. In fact, the US jobs report for the month of October showed that economic conditions in the country are in the midst of a strong rebound. This means that the Federal Reserve is likely to start increasing its interest rate in December. When this happens, consumers will be spending more money on interest and will have less money to spend on products and services, which will turn into struggles for corporations. As a result, investors are balancing their portfolios for the hard times in the market that are soon to come, leading to the declines we’re seeing today.

Why This Is A Bigger Problem For Amazon Than Other Stocks

AMZN is a stock with a relatively unique story. At the moment, the company is willing to either take a loss or produce incredibly small profits in order to grow further, leading to big profits in the long run. As a result, the valuation for AMZN is incredibly high. In fact, according to NASDAQ, Amazon is currently trading at a price that’s 367 times what the company is expected to earn through the full year of 2015. This high valuation adds to the risk of owning the stock. So, when bad market activity happens, AMZN is one of the first stocks to fall.

Another issue for AMZN is the fact that the company does quite a bit of business outside of the United States. This is where a higher interest rate will create another issue. The simple fact is that when the Federal Funds rate is increased, the value of the USD will head upward. When the value of the USD is high, the cost of goods from American companies becomes higher in other nations. This causes declining demand and weighs heavy on earnings.

The Declines Will Likely Last For Months

Historically, after an increase in interest rates, the stock market struggles for a period of several months. As a result, we can expect for AMZN to continue declining for months. First, we will continue to see slow and steady declines from now to when the rate hike happens. When the rate hike happens, the declines will likely get larger before leveling back to slow and steady losses over a series of months.

What Do You Think?

Where do you think AMZN is headed and why? Let us know your opinion in the comments below!