Stock prices slipped off their highs in recent weeks as capital markets contend with some headwinds caused by a bout of inflation and the growing expectation that the Federal Reserve will have to trim back on their generous monetary policy. Ongoing labor shortages and supply chain interruptions are causing delays that have forced companies to lower guidance for the near-term. The bottleneck is especially acute in ports on the west coast, where container ships are lined up to deliver goods arriving from overseas. These headwinds are buffeting an otherwise positive environment for an economy that is gaining employment and generating strong corporate profits. A summer surge in COVID cases caused by the “delta” variant appears to have largely run its course, and we continue to believe the economic threat posed by the pandemic is on the wane.
As pandemic restrictions lifted, our economy sprang back to life. The wave of activity sent businesses clamoring for workers and supplies that revealed constraints in various supply chains. Ports in Los Angeles and Long Beach are the gateway for more than a quarter of our nation’s imported goods. Now, those ports are overwhelmed, with more than 60 ships currently waiting to dock and unload tens of thousands of containers. Prices surge when enthusiastic demand confronts a constrained supply. Over the summer, 224 of the 500 companies in the S&P 500 Index mentioned inflation on their earnings calls, the highest number since FactSet began tracking the data in 2010. The consumer price index (CPI) shot up a lofty 5.2 percent in August, and the producer price index (PPI) rose a record 8.3 percent. While the Fed continues to view those inflationary forces as transitory, they have been motivated to move up their timeline for tapering the easy-money policies that have been boosting markets since the onset of the COVID pandemic. It is likely the Fed will begin trimming back on their open-market bond purchases in the coming weeks, and Wall Street anticipates a series of interest rate hikes could get underway sometime in 2022.
One of the Fed’s primary roles is to keep inflation from becoming a problem for our economy. Investors with good memories will recall the corrosive effect of the stubborn inflationary environment decades ago when the Fed had to take drastic action. It has been forty years since September 30, 1981 when the yield on 10-year Treasuries peaked at a whopping 15.82 percent. That is an era we prefer not to revisit. Today, money is readily available at attractive interest rates, with the yield on a 10-year Treasury at roughly 1.50 percent. Easy access to capital helped corporate profits to rebound quickly from the pandemic-related shutdown, and a strong profit outlook allows companies to hire more employees. Our nation’s official unemployment rate has eased to 5.1 percent, and there are increasingly more open positions than people available to fill them. It is a great time to be looking for work. We expect the Fed will be vigilant on inflation yet careful not to spoil that upbeat story, which means their efforts to rein in monetary stimulus should be slow and methodical.
The COVID virus remains a health issue, but it is diminishing as an economic threat. We may not fully eradicate the virus, but we should be able to limit its damage and avoid another terrible disruption to the economy. The global vaccination effort has already administered 6.2 billion doses, and roughly 58 percent of the U.S. population is now fully vaccinated. In an encouraging new development, scientists appear to be on the verge of an antiviral pill that can cut hospitalization rates in half. Success in late-stage trials of the medicine has allowed them to apply for FDA approval that could bring it to market by year-end. The pandemic has been a human tragedy and unprecedented economic challenge, a chapter that we are eager to see fade into the background. People central to the battle against COVID have recently expressed confidence that the pandemic will subside and people will be able to return to more normal routines.
We are pleased to let you know that Marcia Hailey has re-joined West Oak Capital. She worked with us for seven years before moving with her husband to Colorado in 2015. They have recently relocated to Idaho, and we are happy to have her back on board as the Office Manager in our new office in Eagle, Idaho.
Enjoy a beautiful autumn, and please contact us if you have any questions.