Supply chain shortages; Inflation worries; Rising oil prices; Fed tapering concerns; Interest rate hike timeline – these are the topics that have been filling the business news cycle all week. Let’s break it down:
1. Supply chain shortages – The root of the problem goes back to the beginning of the pandemic in spring 2020, when consumer demand slumped and shipping lines canceled sailings between Asia and North America. When demand came back in the summer, there were thousands of empty containers stuck in the U.S., and by the end of the year, carriers could not handle the surge in imports. Things were getting back to normal earlier in 2021 but the resurgence of Covid cases has now exacerbated the issue by causing a labor crunch, with docks, warehouses and truckers that handled the cargo unable to find enough workers.
Future Wealth’s View – This crisis is going to stay with us through early 2022. Streamlining international cargo and containers, getting new semiconductor plants and equipment up and running are not 6 day or 6 week exercises. It is more like 6 months of effort.
2. Inflation worries – While the inflation outlook was raised in the near term, Fed staff continue to predict the recent acceleration is “transitory.” CPI data on Wednesday showed prices rising by 5.4% Y/Y in September, marking the fifth consecutive month of annual increases of 5% or more. Inflation is going to be a real concern.
Future Wealth’s View – While we don’t claim to be any smarter than the guys at the Fed Reserve, we had written about inflation and our concern that the Fed may be misjudging the duration. In our article in April 2021, we had cautioned our readers that it would be a grave mistake to completely trust the Fed which appears to be dismissing the rising inflationary indicators as temporary. The link to the article is here https://futurewealthllc.com/
3. Oil Crisis – The energy crisis keeps getting worse. Shortages of natural gas in Europe and Asia are boosting demand for oil, deepening what was already a sizable supply deficit in crude markets.
Future Wealth’s View – While tied to inflation in some ways, high gasoline prices is another one that could be with us through the end of 2021 and maybe even beyond.
4. Fed taper timeline – The Fed has said it would purchase Treasuries and agency mortgage-backed securities at the current pace until it saw “substantial further progress” towards maximum employment and inflation that averages 2 per cent. Officials have already determined the inflation threshold has been met and the Fed is expected to announce the beginning of taper in November.
Future Wealth’s View – The fly in the ointment is jobs report – September poor jobs report (194K new jobs created vs 500K expected) could move the taper timeline. Job openings are hovering near record highs but these are not being filled. We expect this could prompt the Fed to be more cautious and delay the taper timeline.
5. Interest rate hike – This is tied to the Fed taper timeline but the Fed has been adamantly trying to decouple the two stating that the purchases may end altogether around the middle of next year, but that the timing should not be interpreted as a “signal” about when interest rate increases could occur.
Future Wealth’s View – An interest rate hike could completely change the landscape of the profitability of all US Corporations and all stock market expectations. We will likely not have to deal with it till 2022 however.
Bottom Line for Investors – The good news is that, despite inflation, demand remains strong heading into the holiday season. Sales at stores, restaurants and online sellers are reflecting strong demand despite higher consumer prices. But that said, the five factors discussed above are going to shape the stock market performance for the rest of the year. It would behoove all investors to pay attention.