THE AUTUMN LETTER
The cure for anything is salt water – sweat. tears or the sea.”
— Karen Blixen
Economic Perspective
As neighbors decorate yards for Halloween, our thoughts turn to Thanksgiving, Christmas and the holiday season. This Christmas shopping season is likely to run into the buzzsaw of supply chain disruptions. The stop/start nature of last year’s initial economic response to the pandemic still bedevils the global economy. Selective inventory buildups in response to some shortages continue to hamper goods flow. The more than tripling of rental rates for shipping containers leaving Asian ports compounds the supply chain problems.
Then, just as American retailers put in last minute orders for the holiday season, the Chinese government, in order to temporarily placate climate activists, has curbed power generation by domestic coal plants. The resulting power shortages has hampered Chinese goods production. So China recorded its most anemic GDP growth in decades in the latest quarter at just 4%.
The US economy faces the prospect of (wage related and commodity price induced) higher inflation and rising interest rates. Social Security recognized the reality of significant inflation in raising annual benefits by over 5% recently. High inflation, which we haven’t experienced in decades, will persist into next year. The cheap money spigot from the Federal Reserve will continue to flow, but at a reduced volume.
A contributor to inflationary expectations is rising labor strength. The job market, with twice as many job openings as workers seeking jobs, promotes a high job quitting rate and a season of strikes, most prominently against John Deere.
Market Thoughts
Stock market indices continue to set new record highs on the rising tide of cheap money. That support should start gradually ebbing soon. But a still vigorous US economy could bolster the stock market in the medium term. Then 2022 opens up an election year.
Corporate earnings results present a positive picture following midyear earnings estimate reductions. Going forward financial firms, technology and select industrials should do better in an improving economy. Insurance bolstered by reduced capital entering the industry and banks supported by slightly higher interest rates (Alleghany, Wells Fargo, White Mountains). Technology (Google, Microsoft, nVidia and more speculative names like Illumina and SolarEdge) and niche industrials (Illinois Tool Works, Reliance) positive on the pharmaceutical (Bristol-Myers, Eli Lilly) and biotechnology (Amgen, Biogen, Gilead).
Gradual economic recovery makes one cautiously positive about stock markets. On a valuation basis, following a surprisingly good year for the stock market, U S stocks are richly priced. We will continue our deliberate, prudent and cautious investment strategy.
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Stephen K. Bache, CFA
Sources: Bloomberg Business Week, The Economist, The New York Times, Emily St John Mandel, Station Eleven
