Michael Zezas: Supply Chain Woes Also Create Opportunities

While many are hopeful for an easing of supply chain delays in 2022, the resolution of these issues may lead to new challenges and opportunities in key stock sectors investors should be watching.

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Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between U.S. public policy and financial markets. It's Wednesday, December 15th at 10:00 a.m. in New York.

Inflation is a hot topic in Washington, D.C. The president talks about it regularly in his Twitter feed and on camera. It's also a favorite concern of Senator Manchin, who openly ponders whether inflation concerns will keep him from casting the deciding vote on the Build Back Better plan. Yet for investors, inflation has always been a necessary obsession, as its presence or lack thereof, typically drives impacts in the bond and foreign exchange markets. But today we want to focus not on the potential effects of inflation, but one of its causes - namely supply chain issues and how the resolution creates challenges and opportunities in some key stock sectors.

But let's start with the why of supply chain issues. Why are the reports of shortages, ships waiting at ports to deliver goods, and rising prices because of the scarcity it creates? In short, it has to do with the extraordinary impact of the pandemic. Social distancing initially drove sharp but short-lived declines in consumer demand and companies' consumer demand expectations. But substantial fiscal aid to the economy led to a rebound in economic activity. Yet this was mostly focused on goods over services as COVID concerns continued to crimp the demand for activities, like eating out. This led to some abnormal and astonishing data. For example, personal consumption of durable goods declined 20% in the early days of the pandemic, more than 10x the decline from the prior recession. Yet by this past October, consumption of durable goods was 40% higher than pre-COVID. It's no wonder that container shipping rates from Shanghai to Los Angeles are 5x their normal run rate.

Yet our colleagues see these pressures starting to abate in the US. Vaccines appear to have eased concerns among the population in consuming services in public spaces and service consumption is now rising sharply, whereas goods consumption growth has leveled off. Our economists expect this will help ease the pace of inflation starting in the first quarter of next year.

While this would be good news for the economy overall, the story could be more mixed across stock sectors. Our tech hardware team, for example, sees a period of weaker orders for semiconductors after customers receive their currently delayed orders. This dynamic could open the door for earnings disappointment. On the other hand, our Capital Goods team sees opportunity, as the current bottleneck may have persuaded a variety of industries that they need to invest in reinventing their supply chains and potentially engage in some re or near shoring, which would require substantial equipment and materials investment.

So as we head into the end of the year, supply chain delays are likely to continue to raise concerns around inflation, but the first half of 2022 will be telling. We'll keep you updated as the story develops.

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