Stock market and economic commentary - Sept 2021

“An idiot with a plan can beat a genius without a plan.”

Warren Buffett, billionaire business magnate and philanthropist

Economic update

The early 2020s may be remembered forever more as the time of the Covid pandemic but a subsidiary label might be that of the shortage years. The dislocation between supply and demand created by the pandemic is starting to weigh on the economic recovery. Growth is being held back by supply issues, labour shortages and rising prices. The world is suffering from a lack of many valuable materials and services from semiconductor chips, cement, lumber and commodities to water, workers, housing and even carbon dioxide.

Rarely has the world economy faced such constraints. A recent survey by the Confederation of British Industry revealed the most severe shortage of parts since the index started in 1977. Consumers are facing reduced choice, delays, and higher prices for many products.

In the UK, Wetherspoons declared it was running low on beer, McDonald’s ran out of milkshakes and shortages of chicken forced Nando’s to close some of its restaurants. Petrol stations are running low on fuel because of a shortage of HGV drivers. Hotels have been forced to limit bed linen changes and delay guest check-ins after a boom in domestic holidays collided with a chronic shortage of laundry staff. The world’s largest carmaker, Toyota has had to cut global production by 40% in response to shortages of semiconductors.

The recent sharp rise in natural gas prices has meant that fertiliser factories have slowed production, reducing the supply of carbon dioxide which is a by-product of the process. The government is holding emergency talks with meat processors due to concerns that the shortage could threaten food supplies (carbon dioxide is used to stun animals prior to slaughter and in packaging.) A dozen small UK energy companies are expected to go bust, or have already, as rising wholesale energy prices have left them unable to provide supplies to customers.

Much of this is unsurprising. In the last 18 months, the world economy has been hit by the greatest, most synchronised shock in modern history. Last spring the UK lost the equivalent of several recessions’ worth of GDP in a few weeks. The recovery has packed years of normal growth into a few months. Demand has swung erratically and unevenly.

The lockdown triggered a run on computer monitors and office chairs, and, as spring came, surging demand for bicycles. In recent months everyone has been buying sports and camping gear. Meanwhile, sales of suits, ties and other forms of office wear have slumped. Production, demand, and stock levels have gone haywire, making forecasting, and planning ever more speculative. No wonder there is such a mismatch between supply and demand.

No system could have coped seamlessly with such shocks, but those systems have flexed. Food retailers have narrowed some product offerings to cope with shortages. Manufacturers are stockpiling products awaiting the arrival of key components. Restaurants have simplified menus. The surprise is not that there have been shortages, but that they have not been worse. More importantly essential services – health, policing, utilities, food, refuse collection, broadband and so on – have generally held up well. More than 6 billion vaccines have been administered, a remarkable feat of science and logistics, achieved in less than 18 months and amid great disruption. Systems have adapted. Given the forces at work, it could have been much worse.

Many of today’s supply problems will self-correct. Surging demand and prices will, in time, expand capacity and increase supply. Higher wages in shortage sectors will attract new entrants. Higher vaccination rates should help reduce the need for restrictions.

Governments and corporates are thinking hard about the risks in their supply chains. The heyday of globalisation at the turn of this century seems like a different age and some production is likely to end up closer to home. Companies need to manage their exposure to geopolitical tensions while governments need to boost domestic industries.

Stock markets

Despite ongoing inflation concerns, the more virulent Delta variant of coronavirus, a disruptive clampdown on foreign-listed stocks by Beijing and a chaotic withdrawal from Afghanistan evoking a rewrite of US foreign policy, the S&P index of US stocks has made a new high for nine consecutive months. Remarkably the index has made a new high no less than 50 times this year. This persistence in making new highs is quite rare.

What does this tell us about the future? In other years when the index made new highs in the first nine months of the year, the final quarter has delivered strong returns, 88% of the time. Will the final months of 2021 follow a similar trend? Only time will tell.

Central banks, led by the Federal Reserve, have made it clear that they are alert to the risks of inflation, but they are in no hurry to withdraw monetary support unless they are convinced the economic data demands it. The trick will be to signal a gradual change in QE without triggering the sort of ‘taper tantrums’, or panic, that buffeted global financial markets in 2013 when the Fed signalled a slowdown of its QE programme. Such tapering of QE, a rough equivalent to easing the pressure on the accelerator, would be conditional and possibly a distant prelude to a light touch on the brakes, in the form of an interest rate rise.

While nothing is certain or guaranteed in investing, a combination of cheap money, waves of liquidity and negative real returns on cash and bonds augurs well for continued buoyancy in financial markets. But as sentiment sways between the exuberance of a new beginning, fears about inflation and new variants of Covid, volatility is bound to ensue. Indeed, late September and early October are often seasonally weak periods for stock markets and the volatility in recent days could easily lead to a more painful short-term correction. We, therefore, maintain a balanced and diversified approach to our funds and portfolios.

Outlook

After the breakneck growth of recent months, the world economy faces challenges. The persistence of the Delta variant, elevated inflation, supply chain blockages and raw material price increases are combining to form a toxic cocktail that is seeing optimism evaporate. At the same time, slowing growth generally has been highlighted by the current weakness in China, while in the US concerns around corporate tax hikes are weighing on the prospects for future profitability.

Meanwhile, the pandemic is far from over. Covid is on the rise globally and the surge in cases in Israel, partly on fading vaccine immunity, highlight the risks facing even highly vaccinated nations. Vaccines, when widely deployed, have substantially weakened the link between cases on the one hand and deaths and hospitalisations on the other. Nonetheless, the Delta variant is far more transmissible than its precursors, many people are unvaccinated, and the vaccines are not 100% effective.

The rising vaccine uptake and boosters should help limit the most serious effects of Covid over the winter, but individual behaviour will continue to play a major role. To avoid lockdowns in Europe and North America may require the selective imposition of restrictions in some form, as well as, for instance, measures such as vaccine passports to gain admission to venues. The UK government’s recent decision to ditch its plan to require vaccine passports for entry to nightclubs does not mark the end of the matter. The Prime Minister’s office has said that the plan would be kept “in reserve” should it be needed.

The economic recovery has moved into a new phase, one marked by slower, more constrained growth and higher inflation. In coming months, the recovery will have to contend with the gradual winding down of government support. The risks are manifest, but on balance, pent-up demand should ensure that the global recovery continues over the winter months, and into next spring.

Amidst all the continued uncertainty albeit spiced with ever-increasing opportunity, Warren Buffet’s assertion that “having a plan is more important than being a genius” strengthens our belief that to provide our clients with the comfort to live their lives to the full, financial planning in the true sense should be the cornerstone of everyone’s strategy.

And finally:

I finish this month’s commentary by sharing an observation made by retired US Marine G. Michael Hopf in his book Those Who Remain. It is about historic cycles and given what is going on in the world, I think it is particularly insightful. He says the following:

“Hard times create strong leaders. Strong leaders create good times. Good times create weak leaders. Weak leaders create hard times.”

I am going to avoid political bias, but I think I know where, on the one hand, Reagan and Thatcher fit into this equation. On the other hand, the jury is quite definitely still out on Biden and Johnson.

The return to normality and freedom is far from smooth and many of us are still fearful of Covid-19 which is going to be with us for a long, long time. We continue therefore to take all necessary precautions to ensure that our office is Covid-safe and secure, for both staff and clients alike. We look forward to welcoming you to the familiarity of face-to-face meetings in Overbank in the coming weeks and months although if preferred we are happy to have client meetings via Zoom and/or Microsoft Teams.

We thank you for your continued support and we look forward to updating you regularly. As always please do get in touch if you have any questions.

Keith W Thompson

Clarion Group Chairman

September 2021

Creating better lives now and in the future for our clients, their families and those who are important to them.

Risk Warnings

Any investment performance figures referred to relate to past performance which is not a reliable indicator of future results and should not be the sole factor of consideration when selecting a product or strategy. The value of investments, and the income arising from them, can go down as well as up and is not guaranteed, which means that you may not get back what you invested. Unless indicated otherwise, performance figures are stated in British Pounds. Where performance figures are stated in other currencies, changes in exchange rates may also cause an investment to fluctuate in value.

Stock market and economic commentary – September 2021