Pallett Wealth Management Team
Global Economic Update
Global equity markets have performed well in recent weeks, with a few having made new highs. Some of the lingering concerns that troubled investors a month ago are China’s property sector, fading global economic momentum, sharply rising bond yields, and inflation. These concerns have recently taken a back seat to the positive third quarter earnings reported by hundreds of companies around the world. Below, we discuss key takeaways from the quarterly results and address the logistical bottlenecks and shortages of materials and labour that are plaguing many industries.
Corporate earnings have been on the rise since economies began to reopen over a year ago. Since last fall, research analysts have largely been raising their quarterly earnings estimates for most stocks, driven by broadening economic momentum. This trend began to change a few months ago, with the pace of upward revisions to earnings estimates slowing significantly. As a result, the expectations heading into this quarter’s earnings season were relatively low.
Nearly half of the earnings season is now complete. Encouragingly, results reported thus far have been good and have reassured investors. Many companies have indicated that demand has been strong and that backlogs (indicative of future sales) are also healthy. At the same time, many companies also made it clear that the availability of materials and the logistical infrastructure required to move supplies and product are facing significant strain. In addition, many companies are finding it increasingly difficult to attract and retain workers.
Some management teams suggested that the supply chain situation may deteriorate in the near-term, and may persist through the first half of 2022. They are endeavoring to find ways of managing their supply difficulties by sourcing materials and components from new suppliers, offsetting cost increases with price increases of their own, and in some cases going as far as reengineering their products. These measures have helped many companies protect their profit margins, despite the challenges.
We expect the supply issues to be resolved over time. Factories forced to shut down are still in the process of reopening. At the same time, capital expenditures are increasing in industries like semiconductor manufacturing, which should eventually alleviate the stress on chip supply. Transportation bottlenecks will eventually improve, as the trucking, rail, aviation and shipping industries are working on a host of measures to ease the high levels of congestion in ports and rail yards. Undoubtedly, the correction of supply shortages and distribution bottlenecks will take time, but the supply chain issues are not insurmountable.
The labour shortage is another conundrum. The pool of available workers in various regions seems to have shrunk. This has led to a high number of unfilled job postings. In the U.S., there are currently about 10 million job openings, well above the 7 million openings seen just a few years ago. The issue is similar in Canada, and it is not yet clear how quickly the labour shortages will be rectified by an increase in the supply of willing labour and training to match skills with openings.
The pandemic may have caused some people to leave the work force for a host of reasons: early retirement, child care, concern for personal safety or simply because the government assistance they received provided little incentive to look for work. Reduced immigration levels are also partially responsible for the elevated level of job vacancies. Some of the influence of these factors will reverse over time as life increasingly returns to normal. There is, however, some risk that a labour shortage could result in sustained wage pressure as the market for workers becomes increasingly competitive. This would add to the inflation narrative that already exists in the marketplace today, and may present a potential headwind to company profit margins.
Overall, the third quarter earnings reports have been met with a sigh of relief from most investors. They also confirmed that supply-related pressures are meaningful, and are likely to persist to varying degrees next year. We will continue to watch labour and supply chain concerns closely, given the implications for central bank policy (i.e. interest rates) and corporate earnings, both of which underpin our positive bias towards equities.
If you have any questions or would like to receive additional information, please do not hesitate to contact us.
Drew M. Pallett LL.B. CFP, Portfolio Manager www.pallett.ca