Morgan Stanley
  • Wealth Management
  • May 4, 2021

Supply-Chain Woes Could Weigh on Markets

Amid strong economic growth and new stock-market highs, reasons for concern have begun to materialize. Emerging supply-chain imbalances stand out as a risk.

As is often the case with bull markets, a lengthy run of good news and better-than-expected economic data has helped propel stocks to all-time highs. Investor risk-taking has increased, and confidence has begun turning into complacency. Now, new risks are emerging. Key among them: mounting supply-chain woes that are making it harder for businesses to keep up with soaring demand.

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These pressures come as a faster-than-expected vaccine rollout in the U.S. is helping drive stronger economic growth, with states like New York and California targeting July 1 for full reopening. The supply-chain imbalances are becoming so severe that their risks go beyond the short-lived bout of inflation that many analysts predicted. Rising real-time production delays could crimp sales and drag down corporate earnings and economic growth.

With 2021’s first-quarter earnings season well underway, references to inflation and supply-chain pressures on company conference calls have been triple the average of the past decade.1 Some corporate executives say that they may have to curtail production due to a lack of semiconductors and electronic components. That could also slow the labor market’s recovery.

Supply-chain pressures aren’t the only concerns. In the weeks and months ahead, investors may also want to be cautious about: 

  • Soaring home prices: The imbalance between pent-up demand and available inventory isn’t just an industrial problem. With existing housing inventory at historic lows and home prices appreciating at an eye-popping 12% annualized rate,2 the pace of new mortgage applications has slowed, as more would-be homebuyers get priced out. This decline in housing affordability could stall one of the most important engines of U.S. economic growth.
  • High levels of margin debt: One manifestation of investors’ increased risk appetite has been the recent rise in margin debt, or money borrowed from financial institutions to buy securities. Margin debt has grown 72% year-over-year to levels that have often preceded stock-market declines.
  • Policy headwinds: Policy could become a headwind this fall, as Federal Reserve officials begin to discuss a timetable for tapering bond purchases and Congress debates tax and stimulus plans.

Consider that positive economic surprises and the pace of earnings forecast revisions may be peaking. As such, investors may want to begin slowing their deployment of cash into U.S. equities, while they await better entry points into the market, such as a resumption of positive earnings revisions or a U.S. market correction. We also suggest favoring non-U.S. stocks over the next six to nine months.

This article is based on Lisa Shalett’s Global Investment Committee Weekly report from May 3, 2021, “Peak Everything.” Ask your Financial Advisor for a copy or find an advisor. Listen to the audiocast based on this report. 

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