Will the Supply Chain Crunch Hobble Holiday Sales? - Adviser Investments

Will the Supply Chain Crunch Hobble Holiday Sales?

November 1, 2021

Please note: This update was prepared on Friday, October 29, 2021, prior to the market’s close.

Strong corporate earnings trumped slower economic growth and traders doled out more treats than tricks this week, pushing the S&P 500 stock index to new highs.

While the pace of economic growth eased in the third quarter—the first read clocked in at a 2.0% annual pace—we’d warned that the U.S. economy was never going to be able to sustain the 6%-plus growth rates seen in the first and second quarters of 2021.

Still, company profits were stronger than expected. Of the nearly half of S&P 500 companies that have reported earnings, 82% have bested analysts’ expectations and many have seen their profit margins expand despite rising input costs.

The fly in this week’s earnings ointment came from big tech. Amazon blamed supply issues and a tight labor market for missed estimates. Apple’s sales were $6 billion light thanks to the chip shortage. And both companies warned that they were likely to disappoint during the critical holiday shopping period.

When market-cornering companies like Apple and Amazon are getting pinched, the scope of the supply chain crunch comes into starker relief. But until the consumer shows signs of slowing down (despite a decline in personal incomes, consumption rose again in September), there appears to be fertile ground for further economic growth in the face of rising prices.

Fed Faces Questions

The Federal Reserve convenes for a scheduled two-day meeting next week, concluding with a Wednesday afternoon policy statement and press conference from Chair Jerome Powell. The question at hand: Take a foot off the stimulus gas to fight inflation and risk upending the economic recovery by acting too soon, or keep the pedal to the metal and leave the inflation battle to another day?  We’ll have a clearer answer next week, though the cake may already be baked.

The Wall Street Journal reports that Powell has garnered consensus among policymakers that the central bank should begin reducing (or “tapering”) their asset purchases in November. That would create a glide path for the Fed to reduce bond buying by $15 billion each month, bringing the policy to an end by June 2022. With that spending program retired, officials could begin to consider raising rates if inflation’s still high and the economic recovery remains robust.

Fed plans aside, it appears that bond traders are worried about inflation and a slowing economy.

The “breakeven” inflation rate for the next five years (the difference in yield between 5-year Treasury bonds and 5-year Treasury Inflation Protected Securities) rose above 2.9%, the highest it’s been since 2005. This signals that bond traders are worried about inflation in the near term. Meanwhile, the yield on long-maturity bonds fell this past week, suggesting that traders suspect economic growth will be slower in the long run.

Whether Powell will be the one to manage the near- or long-term course of inflation and the economy is out his hands. His four-year term concludes in February and President Biden has been vague about his intentions to keep or replace the current chair.

While Fed watchers and market pundits alike are leaning toward Powell remaining in the seat, it’s unlikely that a new appointee would decide to pull back from the current playbook in any major way—and we don’t expect Powell’s job uncertainty to impact his inflation-fighting approach and outlook at next week’s meeting.

Hertz Puts Drivers in the Tesla Seat

One of the most interesting events this week was a deal between Hertz, fresh out of bankruptcy, and electric-vehicle pioneer Tesla—the rental car company announced plans to buy 100,000 Tesla vehicles. About half of the fleet will be used for consumer rentals and the rest will be leased out to drivers of rideshare giant Uber.

We’re excited by this deal because it’s a great example of how flexible companies can manage around pandemic dislocations with agility and disruptive behavior. Since when does a hoary rental car company pivot so quickly to offering electric vehicles (EVs) like Teslas? And in such big numbers?

Of course, this isn’t just about buying EVs; it’s also about appealing to the growing consumer desire for environmentally acceptable transportation. And it’s about infrastructure: You need to have ample charging stations for rental clients to feel confident road-tripping in their newly rented Teslas, and you also need to juice up all those Ubers buzzing through town delivering people and food to their destinations.

Tesla’s stock did better than Hertz’s on the announcement, but it’s a pretty remarkable deal that could find the recently insolvent rental company back on the road to solid mid-cap respectability—and it augurs that the EV revolution may be another societal and economic trend accelerated by the pandemic.

Emerging Market Bonds: Good Bet or Bad?

This week’s reader question is on fixed-income investments in developing countries: What is your thinking on emerging market bonds? Is now the time to invest?

Research Analyst Jennifer Yousif had this to say: 

Emerging market bonds can add diversification and increase the yield in your portfolio. The downside is that the higher yield comes with additional risk—though not as much as in years past. In fact, some large emerging market countries, such as Mexico, China and South Korea, hold investment-grade ratings.

Emerging market bonds
Note: Chart shows nominal sovereign yields as of 10/27/21. Source: Bloomberg.

That said, risks still exist.

The recent hubbub surrounding Chinese real estate giant Evergrande is Exhibit A. A month ago, the company dominated the news cycle after it missed an interest payment to offshore bondholders. Since then, other Chinese land developers, including Modern Land and Fantasia Holdings, have had similar difficulties meeting their debt obligations.

That sounds ominous—largely because it’s reminiscent of the mortgage-related bonds at the center of the 2007–2008 global financial crisis—but we think the fear of contagion (problems spreading to other areas of the market) is overblown. The challenges facing Chinese property developers have been building for years: Evergrande’s stock was down over 70% even before their default made headlines, and their debt is not tied into the global system the same way U.S. mortgage-backed bonds were back in the day. Oh, and Evergrande has actually managed to make a few of its payments more recently.

In other words, investors selling all emerging market bonds are throwing the baby out with the bathwater.

Right now, emerging market debt offers investors a yield premium of about three percentage points above U.S. Treasurys. We’ve seen it offer more than that (and less), but today’s level is fair by recent historical standards. Within our diversified fixed-income portfolios, we don’t currently own any funds that buy only emerging market bonds—we’d be more inclined to establish such a position when the risk-return dynamics look more favorable. However, the managers of the diversified bond funds we buy for clients have the flexibility to buy emerging market bonds in moderation. And they will use it.

We think this makes good sense, as emerging market debt is ripe for active management. There are 30 or so emerging market economies, each with different characteristics. That’s a vast pond for an investor to traverse in search of the best opportunities.

Ask Us a Question!

We’re always interested in the topics or concerns you might like us to comment on. As much as we try to cover the investment and economic fields every week, we know there’s still more that you might want to hear about. Ask us a question about investing, the markets or financial planning and one of Adviser Investments’ experts will answer it in a future edition of The Week in Review. CLICK HERE NOW TO POSE YOUR QUERY.

Financial Planning Friday: Dividing Assets During Divorce

Divorce is a crossroads that nearly half of all married couples in the U.S. have walked. No matter how amicable the situation, it can be both emotionally and financially overwhelming. Here are a few pointers to help you find your footing and begin to move forward.

  1. Inventory your effects. Begin by compiling a list of assets (including homes, jewelry, cars and art) and financials (bank accounts, safety deposit contents, employer-funded incentive programs and IRAs). Examine the past five years of tax returns, too, to help you tally income and assets that might otherwise be missed.
  2. Divide your assets. With the comprehensive list of assets in hand, determine which are “separate property,” acquired before the marriage—such as family inheritances or gifts—and what is “marital property,” accumulated within the marriage. There are nine community property states where spouses split everything amassed during their union equally, regardless of who purchased or earned it. The other 41 states strive to divide marital property “fairly,” often through the courts or arbitration. State rules vary, so always consult your lawyer.
  3. Manage taxes. Asset transfer between spouses during divorce is considered a nontaxable event. However, avoiding unnecessary tax liabilities requires careful planning with respect to pension and defined contribution plans, property settlements, carrying capital losses forward, using spousal support as earned income for purposes of contributing to IRAs and more. Work with your financial planner or Certified Divorce Financial Analyst (CDFA®) to determine the options available in your unique situation.
  4. Maximize Social Security benefits. If you’ve been married for at least 10 years, you may be eligible to receive Social Security benefits as a divorced spouse. There are exceptions and stipulations, so stay informed and plan accordingly. For instance, if your 10-year anniversary is coming up, it often pays to wait the extra few months to finalize the divorce to lock in spousal Social Security benefits for the lower earner.
  5. Update your estate plan. Your financial footprint comprises more than just investments—it’s also important to update your tax filing status, will, beneficiaries, life insurance policies, health care proxy and power of attorney. (You may not want your ex-spouse to inherit your assets or make medical decisions on your behalf if something were to happen to you. And remember that your beneficiary selections on your account documents supersede whoever you name in your will.) Aside from asset division, divorce is a time to revisit your individual financial plan to reset your priorities, independent of your partner.

For more information, you can read our blog post on financial steps to take during divorce or listen to our podcast episode on this topic. Navigating the financial terrain of divorce is challenging, so we strongly suggest consulting a lawyer and CDFA®.

Strategy Activity Update

Please see below for a summary of the trades we executed over the week through Thursday and our current tactical strategy allocations.

Dividend Income

No trades this week.

AIQ Tactical Global Growth

Sell Cash Reserves. Buy iShares US Healthcare Providers ETF (IHF).

AIQ Tactical Defensive Growth

Buy iShares Core S&P 500 ETF (IVV). Sell Cash Reserves.

AIQ Tactical Multi-Asset Income

Buy Invesco Senior Loan ETF (BKLN). Sell VanEck Fallen Angel High Yield Bond ETF (ANGL).

AIQ Tactical High Income

No trades this week.

Adviser Investments in the Media

Chairman Dan Wiener spoke to InvestmentNews about Vanguard’s model-portfolio partnership with American Funds.

In this week’s Market Takeaways, Research Analyst Liz Laprade discussed Facebook’s earnings call amid controversy, while Portfolio Manager Steve Johnson offered his thoughts on the October rally.

And remember, you can always visit the Adviser in the Media section of our website for the Adviser Investments team’s informative views on the market and the economy.

Looking Ahead

Chair Jerome Powell’s Wednesday press conference following the Federal Reserve’s two-day meeting will be in the spotlight next week. We’ll also get useful reads on manufacturing, construction spending, the service sector, consumer credit and the unemployment rate for October.

As always, please visit www.adviserinvestments.com for our timely and ongoing investment commentary. In the meantime, all of us at Adviser Investments wish you a safe, sound and prosperous investment future.

If you have any questions or concerns, please don’t hesitate to email your wealth management team or call our toll-free number, (800) 492-6868.


Please note: This update was prepared on Friday, October 29, 2021, prior to the market’s close.

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