Another Friday comment from us and another late week rally ensues. Stocks were in positive territory across the board yesterday, this time led by Technology, Basic Material, Financial, Industrial and Discretionary stocks. That screams optimism on the economy. Energy, which has been the leading sector in 2021, lagged along with Consumer Staples and Utility stocks. Defense took a back seat but still garnered better than 1% gains on the day. In total, it was the best day for the S&P since March, rallying 1.7%.
However, it was Cyclicals shining, with risk-on staging a massive comeback after positive updates. Earnings reports are flowing through, especially for big-cap banks this week. Beats are aplenty as JP Morgan#, Morgan Stanley, Bank of America and even Wells Fargo touted results handily above estimates. Stock returns, however, were muted for those specific stocks while peers gained ground. The S&P Financial Index jumped 8% in just 5 weeks, so some profit taking is to be expected, especially as the 10-year Treasury yield consolidates rapid gains. It has dropped from 1.62% last week to 1.52% this morning.
We all know what happens when yields go down; technology and long duration assets go up! The Nasdaq experienced a near 10% correction when rates spiked in September. Now, we’re only 4% from new all-time highs. Earnings out of Taiwan Semiconductor#, the largest semiconductor manufacturer in the world, eased concerns on bottleneck pressures somewhat, with the company handily beating analysts’ estimates. We’re not out of the woods quite yet, but an over emphasis on near-term transportation potholes has increased pressure on the semi space in particular. A few quarters of delays or a mini-slowdown in earnings will not affect the long-term bullish posture for chips. This sector is often volatile, but I’m hard pressed to see any reason why demand for 5G, Internet of Things, artificial intelligence, cloud computing and the desire to connect virtually everything will slow this decade. Traders can play this game; long-term investors should sit tight.
On the supply front, there’s better news (depending on your feelings for Government intervention) with respect to ports and drivers around the country. On Wednesday afternoon, President Biden and Transportation Secretary Pete Buttigieg offered a lending hand with respect to cargo ships piling up in the oceans and storage facilities being overwhelmed with containers stacked on top of each other. While acting as “an honest broker”, they helped/coerced the Port of Los Angeles transition to 24/7 operations like much of the world already does. In fact, the Port of Long Beach, a mere 11 miles away, did the same shift a few weeks ago. These two ports account for 40% of all container traffic entering the US. President Biden also got commitments from companies like Amazon#, Walmart#, UPS, FedEx# and Target to increase truckers’ hours in order to get products to their desired locations faster.
Judging by comments from port authorities around the country, issues are more related to the second leg of drop-offs, namely those truck drivers. We’ve been short available drivers for several years now. Back in 2015, Interstate trucking laws were changed to limit a driver to stay below 60 hours for a 7-day consecutive period. Further, a property-carrying driver can only drive a maximum 11 hours after 10 consecutive hours off duty. Electronic logging devices had to be installed by 2017 to ensure compliance. Further, retirements are taking many previously employed out of the workforce. That labor loss needs to be replaced by the next generation. How many millennials want to drive around alone all day, quit texting and checking their Instagram accounts for a job that likely gets replaced by autonomous driving at some point in the next decade? Until these issues are fixed, or a relaxation of current Federal laws happens, the only thing that will fix the delays is time. Eventually it will all get repaired, but many Christmas presents will be sitting in a Chinese factory storage bin until 2022.
Supply chain disruptions have been global in nature, exacerbated by Covid-induced shutdowns for many factory floors and ports in much smaller countries which lack access to vaccines or whose citizens show an even larger reluctance in taking a needle. That has led to 2021 showing more deaths from Covid than last year at this time, albeit with the trend certainly on the downswing today. Shutdowns are unlikely to hit them again. Bottlenecks are already improving, but will take months, government intervention or not.
Will a cleansing of our supply chains help with inflation? One should hope so. One of the biggest drivers of price increases this year stems from lack of supply, especially in autos. Used cars from three years ago are being sold at the same price but with 30,000 miles on them. Once cars get back into dealer lots, prices will subside. This alone should alleviate 10 – 30bps on CPI calculations. Apply that across the spectrum for food aisles, sporting goods stores, clothing outlets and many other out of stock industries and pressure should abate on the inflation front. Pare that with more factory workers coming back to the workforce, Covid concerns easing with case counts dropping (along with a promising new Merck treatment option), and ports opening back up worldwide, and we should expect gradual improvements. Recall, demand for goods isn’t even above 2019 levels for most sectors, it is a supply and delivery crunch that has to be fixed. It is highly likely we’ve already passed peak cargo delays today.
For markets, broader participation is encouraging after our first 5% correction in indices since last year. New highs are seen in numerous areas. Yesterday alone, Bank of America, BP Amoco, Oracle#, United Health#, Salesforce#, Oneok#, Lowe’s#, Xilinx, Aon# and Waste Management all made new 52-week highs. They are all very different entities offering varied products and services in healthcare, software, gas pipelines, home improvement, semiconductor and even trash industries. The longer this recovery is led by the soldiers instead of just the FANGMAN generals, the better.
More earnings are ahead. So is more inflation data. If the 10-year Treasury can stick in this lower range, then it is more likely we can get back to making new highs in the major stock averages before year-end. Pay attention to previous leaders who aren’t making new highs though, and dig deeper on new leadership. This rotational environment seems to be coming back to the fore. Some STIMIED pressure (https://towerbridgeadvisors.com/blog/october-8-2021-stocks-have-been-stimied-more-later-over-the-past-month-with-numerous-headwinds-popping-up-one-of-them-the-debt-ceiling-looks-to-have-a-solution-even-though-it-is-basically-kic/) is being alleviated. Just don’t be discouraged if your favorite toy is not delivered by the Holiday season.
Not many birthdays today but “I Love Lucy” debuted back in 1951 today.
James Vogt, 610-260-2214