Market Comment: Shortages and the Stock Market

Ann Miller |

We have enough vaccines but now there are shortages of nearly everything from raw materials, intermediate goods, including semiconductors, and labor as well.  What we do not want is a slowing of output, earnings and job growth with higher prices.  This country has not seen commodity prices this high since the Carter administration.

A concern is stagflation, which is high inflation and low growth, but we have offsetting factors to consider.   Manufacturing is stalling and this has been a primary mover of global economic and earnings over the last year.   The numbers indicate supply constraints rather than slowing demand.  This will affect consumers - the first of which is any type of contracting such as home building. The average home price has risen almost $35,000.00 to account for the dearth of supplies, including lumber and metals necessary for electrical work and steel.  The shortages are global, even in plastic and boxes as there are global shortages in container board used to make cardboard.

Another factor that speaks against stagflation is the central bank response, which states that the ongoing rise in inflation will be ‘largely transient’, and that they intend to be very cautious in tightening policy.  The current administration plan for another US stimulus program as well as Europe’s rescue spending may further increase demand.  Capital spending may also attract more capital expenditures by businesses worldwide.  

U.S. stocks were lower this week, as issues within the Information Technology sector came under heavy pressure and weighed on market indices. The economic calendar was quiet, as the markets continued to evaluate April’s disappointing employment report from last week and began to look ahead to a host of inflation reports later in the week. The inflation reports will be of particular interest to investors as uncertainty remains elevated regarding when the Fed could begin to taper its asset purchases. Earnings continued to roll in.  Crude oil and gas prices were little changed, after a cybersecurity attack over the weekend closed a key pipeline in the U.S. Meanwhile, Treasuries were lower and rates across the curve rose ahead of the mid-week inflation data, and the U.S. dollar was close to flat. Gold traded to the upside. Asia closed mostly higher, while Europe finished mixed.   

The question that lies beneath all of this is the high probability that Congress could raise taxes on corporations this year, effective in 2022.  The estimate is a tax rate of 26%, up from the current 21%.  Higher taxes on corporation’s foreign income are likely as well, but more uncertain.   We see this effect as a mid-single digit impact to average equity prices.  

As always, please call us at Affinity Capital to discuss any further questions concerning your portfolios.  We appreciate the opportunity to serve you.