Think of the supply chain as a well-oiled machine—a machine of different cogs working in unison worldwide to deliver parts and products to consumers. When one—or in this case several—of those cogs jam, the entire system comes to a standstill.
Covid-19 has left its mark on every industry, not just in the United States, but around the world. The pandemic triggered sweeping labor shortages and manufacturing lockdowns, which has led to increased shipping costs and a bottleneck in the movement and production of goods. Now, in late December, these supply chain problems have investors and soon-to-be-retirees concerned about their future.
Uncertainty looms, sparking concerns about long-term wealth management planning. However, with better insight into these supply chain problems and any potential fallout, you can head into 2022 with a strong game plan for your financial portfolio.
A Deep Dive Into Supply Chain Challenges
Record Breaking Labor Shortages
One of the most significant contributors to current supply chain issues is the discrepancy between unemployed people and open jobs. The Bureau of Labor Statistics (BLS) reported 11 million open positions at the end of October 2021. However, job seekers only filled 6.5 million of those positions. Thankfully, the unemployment rate continues to improve, dropping to 4.2% in November 2021, according to another recent BLS survey. However, this is still substantially higher than pre-pandemic levels of 3.5%. While it’s clear the workforce is trending in the right direction, the worst effects of the pandemic on the job market still linger.
While unemployment rates are improving, we must understand where those rates are improving (and not), and how this influences the bigger picture. Shipping and manufacturing are the two pillars of the supply chain. As of November 2021, manufacturing was down 253,000 jobs, compared to pre-pandemic levels from February 2020. The shipping industry has likewise been affected, which inevitably leads to bottlenecks and backups.
Ports, Transportation, and Product Shortages
Think of the supply chain as a well-oiled machine—a machine of different cogs working in unison worldwide to deliver parts and products to consumers. When one—or in this case several—of those cogs jam, the entire system comes to a standstill. This is the situation that occurred in Southern California, where more than 70 container ships sat idle off the coast of Los Angeles sending shockwaves through the global supply chain ecosystem.
The Ports of Los Angeles and Long Beach account for 40% of shipping containers entering the United States. Boats full of these containers—loaded with consumer goods—arrive from Asia with nowhere to dock. They sat idle in the San Pedro Bay as understaffed docks try to clear the clutter, working around the clock to unload and transport the containers to their destinations. However, the receiving destinations aren’t working around the clock, so when a container arrives at a warehouse at 4 a.m., it can’t unload, leading to further bottlenecks. When the containers are finally unloaded and brought back to the dock, there’s nowhere to put them. Ships sit in the bay for weeks at a time—the same amount of time it would take to make a refill trip across the Pacific—while empty containers sit on trucks, causing the entire process slow to a crawl.
The Biden administration began targeting this port back-up in autumn. As the crisis reached its most dire point, the Ports of Los Angeles and Long Beach announced a temporary shift to a 24/7 schedule. Simultaneously, President Biden announced a deal with shipping giants such as FedEx, UPS, Walmart, and Home Depot to increase nighttime working hours at these West Coast ports. The International Longshore and Warehouse Union (ILWU) also agreed to longer and extra shifts for workers at these ports during this critical period, in an all-hands-on-deck attempt to alleviate this bottleneck.
However, the San Pedro Bay crisis is only one contributor to the shipping backup occurring across the country. Ayman Omar, associate professor at American University’s Kogod School of Business, says the shipping and freight industry was already experiencing difficulty keeping up with growth pre-pandemic. The trucking industry regularly sees turnover rates higher than 90%—and this even before the current economic crisis. This difficulty in maintaining employment levels most certainly played a hand in the transportation standstill.
Worldwide Supply and Demand Issues
Labor shortages and shipping issues are only the tip of the iceberg—a single domino in a long line of toppling bricks that have left the global supply chain looking like an LA traffic jam. The problem began in the early stages of the pandemic, when factories around the world that play a significant role in global manufacturing—were shut down amid rising Covid numbers. Factories in China, Vietnam, South Korea, and Germany sent their workers into lockdown, anticipating dwindling manufacturing demands as the rest of the world halted retail consumerism. They were wrong.
Americans received $1,200 in federal stimulus money when global factories shut down. While some needed that money to stay afloat, many spent it on household products and personal items. Home improvement, hobby projects, video games, computers, tablets— this boom in demand ramped up production in factories that were already in short order. Furthermore, operational facilities still relied on others to send them raw materials.
With a drastic and unforeseen rise in demand, factories that could get products out sent loaded shipping containers to every corner of the populated world. Safety equipment, like masks and hospital gowns, were prioritized, with much of the production coming from China. So, when a Chinese container full of supplies arrives in West Africa, the container sits there. Why? Because those countries rarely, if ever, ship anything in such quantity back to China. As a result of the pandemic, rising energy costs and the demand for scarce containers, caused the rapid inflation of shipping costs. Pre-Covid, it cost about $2,000 to ship a container from China to LA. By early 2021, that same journey costs about $25,000 per container. Unless a company is sending a full container back across the Pacific, nobody wants to pay $25,000, which is more than 10x what they were paying a year ago.
Supply Chain Problems and Inflation Rates
The basic principle of supply and demand—coupled with the pandemic’s lasting effects on trade—is behind rising inflation rates. There are far more job openings than available workers, driving up wages and overall cost of goods and services sold, which in turn boosts prices and ends up increasing inflation.
Additionally, many manufacturers operate on an on-demand principle, meaning they only produce what’s expected to sell—thus eliminating the cost of storing excess inventory of finished goods. Once the pandemic began to ease and the demand for basic goods skyrocketed, understaffed manufacturers couldn’t keep up. They weren’t built to operate this way, nor did they have a surplus of product to tap.
The most blatant example of this is the semiconductor shortage. When only a handful of companies produce one of the most necessary components of modern life—the new oil, if you will—factory closures, labor shortages, and high demand combine to create a bottleneck. Inflation then ticks up as global supply chain stagnation hinders manufacturing and shipping for extended periods.
By October 2021, the inflation rate was sitting at 6.2%, well above the Federal Reserve goal of 2%. And as the Fed retires the word “transitory” from their description of our current inflation—suggesting these levels aren’t going down anytime soon—investors worry that there is no light at the end of the tunnel.
How Might the Current Situation Affect Investments?
Depending on how you manage your money, your investments may survive the rising inflation rates unscathed. Both stocks and bonds alike are susceptible to losses, since inflation impacts purchasing power. However, inflation typically has a smaller effect on stocks—though the downward pressures on stock prices can still cause fluctuation. Bonds face greater risk since, as inflation decreases the dollar’s value, it also devalues interest payments and future dividend cash flow. It’s then up to the Fed to increase interest rates and tighten the money supply, discouraging companies and consumers from borrowing and spending money, potentially reducing some of the downward pressure on the dollar’s purchasing power.
Regarding Supply Chain Problems
The Federal Reserve is urging Americans to prepare for an ongoing supply chain issue well into 2022. As the supply chain issues persist, stocks may exhibit volatility as investors grapple with the impact these issues will have on future earnings. However, not all areas of the market will react the same way and there may be opportunities that open up as the ever changing market redirects investment capital and consumer spending patterns shift, creating opportunities for the savvy investor.
Delivery services seem to be navigating these supply chain problems better than most. For example, UPS is currently setting record-breaking quarters. Even though the supply chain is currently experiencing some back up, people still have to ship and receive goods. Delivery services have been able to take advantage of the demand.
Similarly, eCommerce and retail giants appear to have navigated the supply chain problems well, especially during the holiday season. Consumers still consume, even if Covid limits their options, and the larger companies have been able to use their expertise and logistical relationship to continue offering in stock goods to consumers.
Finally, as the global population transitioned further online over the last 18 months, cybersecurity became more important than ever. Internet scams and the need for secure checkout in online retail spaces put digital safety at the forefront. Its importance won’t disappear as pandemic restrictions and limitations ease, making cybersecurity an increasingly important sector.
Investors looking to diversify the risk in their portfolio could also seek opportunities outside of the US market, like in the European market. Fewer reports of supply chain issues in Europe suggest EU businesses are experiencing less bottlenecks than their North American counterparts. High inflation in the US could also steer investors toward the European market, which presently hasn’t been under as much inflationary pressure.
While we are slowly progressing to a resolution with our current supply chain issues, the outlook for the future remains uncertain. The problems we’ve noted—labor shortages, transportation backlogs, constrained manufacturing output, and inflation—will continue to affect investments in unexpected ways as the global economy re-stabilizes. Considering all of this, having an adaptable and actively managed financial plan is more important than ever. An experienced wealth management advisor can help you create a plan that minimizes the impact of these fluctuations on your portfolio.
If you’re concerned about the uncertainty and volatility of your holdings, consult with the experts at Polaris Wealth Advisory Group to better understand how supply chain issues could affect your financial future, and more importantly, develop a plan to help successfully navigate through it.
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