By Tim Courtney, Chief Investment Officer
Over the last 20 years, things have, for the most part, gone smoothly for producers, consumers and investors. As always, there have been bumps along the way, such as the mortgage crisis in 2007-2008 and the COVID-19 pandemic. But we’ve seen relatively stable conditions: positive GDP growth, falling interest rates and low inflation, profit margins that moved from the high single digits to near low teens and S&P 500 earnings that have quadrupled.1 All with market volatility hovering about 20% lower than the last 100 years’ average.2
Markets and trade were globalizing, supply chains were set up to produce efficiently at the lowest cost and companies operated with inventories and transportation that were just at the level needed to meet demand. This helps keep costs low for consumers and margins higher for efficient producers, however, there is less margin for error with this system.
The Ever Given cargo ship ran aground in the Suez Canal in March 2021,3 blocking other ships for days, which had a domino effect throughout the global supply chain. U.S. ports, many of which were already working at full capacity last fall, struggled to handle any increase in shipping. Ships had to wait their turn offshore, with delays reaching up to 17 days in mid-November.4 Once on land, goods were more expensive to move due to labor shortages.
Many Chinese factories shut down or slowed deliveries due to the country’s attempt to eradicate COVID-19. With so many supply chains running through China, any delay in deliveries from factories would start to cascade problems through global production. Issues with labor in the U.S. are causing headaches for companies as workers are quitting at high rates and are more insistent regarding when and where they work.
We now have a war, which, along with the human toll and suffering, is further complicating global markets. Any one of these incidents would cause problems for a system working right at capacity and in which little investment has been made to broaden real infrastructure. The fact all this happened in a short amount of time is exacerbating problems.
To address this, real infrastructure spending has increased and companies are looking to update their supply chains and may re-shore operations to the U.S. or neighboring countries like Mexico and Canada.5 There could also be some lasting effects on globalization resulting from the war, with like-minded countries developing more integrated systems together.
However, none of this will happen overnight, and we believe inflation risk and volatility will continue to remain elevated for a number of quarters. If you have any questions, please contact your Exencial advisor.
- S&P Global (02/28/2022) – S&P 500 earnings and estimate report
- DFA Returns 2.0 (12/31/2021) – S&P 500 Index standard deviation
- CNN (3/24/21) — Suez Canal blocked by traffic jam after massive container ship runs aground
- Bloomberg (11/13/21) — Ships keep coming, pushing U.S. port logjam and waits to records
- The New York Times (1/5/22) — Supply chain woes prompt a new push to revive U.S. factories
The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 9.9 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 3.4 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
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