Supply chains and inflation were likely hot topics at Thanksgiving dinners around the country this year. Most Americans are likely noticing the same things – higher prices for many goods, labor shortages at local businesses, more expensive gasoline, etc. Supply chain problems are a key factor driving price pressures, in addition to robust consumer demand tied to a strong labor market, higher wages, and accumulated savings.1
Simply put, there is too much money chasing too few goods and services.
Consumer demand seems unlikely to abate significantly in the near future. The jobs market has been improving, wages have been ticking higher, and entrepreneurs are starting new businesses at a rapid clip. According to the Census Bureau, applications for 4.54 million new businesses were submitted in the first three quarters of 2021, the most on record and with a 56% leap from the same period in 2019 (before the pandemic).2
That leaves the supply side of the equation – of goods, services, and labor – as a key determinant of whether price pressures will ease in the coming months or quarters. In my view, we should see improvements across the board relatively soon, but I also expect these improvements to be underappreciated and underacknowledged by investors and the media, at least at first. And that could be bullish for stocks.
In fact, there are already signs supply chain problems are easing, but my guess is that few readers have heard about them. In Asia, energy shortages and port capacity limits have eased, and ocean freight rates have fallen from record highs. China has resumed manufacturing largely at normal capacity since October. In the United States specifically, major ports are still congested and ships are still waiting to offload goods, but at the same time, major retailers like Target, Home Depot, and Walmart were all well-stocked for the holiday shopping season.
Oxford Economics surveyed “country experts” across 45 economies and found that nearly everyone believed supply chain disruptions had peaked. This assessment does not mean the issues are over – but it does confirm emerging evidence that global supply chain bottlenecks are at least easing, which could lower logistics costs and allow production to begin catching up with demand.
There is also a distinct possibility that supply shortages could ultimately become supply gluts in the next couple of years. A great example is in the auto industry, where there is a significant amount of partially built vehicles parked around the country just waiting for the delivery of semiconductors. Once the chips are installed and the vehicles move into dealerships, supply could potentially outweigh consumer demand. Similarly, the Bank for International Settlements recently noted that many companies are establishing ‘precautionary stockpiles’ of parts, which could be exacerbating shortages. Supply could easily overshoot demand once it catches up.
My point here is not that supply chain and inflation reporting is overblown – there are of course major issues that are creating shortages and rising prices. But I think many investors are starting to assume these problems – and the inflation that comes with it – is more permanent than temporary. So even when improvements start to take hold, which I think we are starting to see now, few are likely to notice. And that could be good news for stocks.
Bottom Line for Investors
The notion that supply-demand imbalances will persist longer than expected is becoming a widely-held belief. I’m not saying this belief is wrong, but I have been starting to notice several, underappreciated improvements to supply chain problems that few people are noting. And anytime a gap starts to form between how worried people are and how worried they actually should be, that tends to be bullish for stocks. I think that’s what we’re seeing now.