Market perspectives from Wells Fargo Investment Institute
Nov. 10, 2021: “The outlook for volatility is likely — strong, you might say — as we get past Thanksgiving and closer to the beginning of December.” Paul Christopher, head of Global Market Strategy for Wells Fargo Investment Institute discusses the ongoing debate over spending bills in Congress, the global ripple effects of supply chain disruptions, and more in this market update.
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Paul Christopher, head of Global Market Strategy, Wells Fargo Investment Institute:
Well, the short answer is ‘Not yet, but we think it will.’ It’s a trillion dollars in spending. It’s really unprecedented, $550 billion in new spending, $450 billion to replace expiring legislation on the highway bill. But that $550 billion in new dollars, that’s going to go to help improve roads and bridges, of course, but also water infrastructure, which we really need in this country, as well as high-speed internet more uniformly available across the country, and improving the electrical grid. All of these things will make the U.S. more competitive. Problem is that it’s going to take some time for all of this money to get flowing and the work to get moving. In the first place, Congress is going to need about a year to figure out the rules that it’s going to use to allocate the money. In the second place, there are probably still some environmental requirements, environmental impact requirements, that will slow things down a little bit. But look, let’s keep the focus here. We should be looking at the economy right now. The economy next year is, we think, going to be very strong. That should support industrials. So if the economy is strong and industrials do well, let’s get overweight now in portfolios, in industrials and perhaps by the time the market is ready to start discounting or factoring in the infrastructure plan, perhaps late next year, we might be able to just continue that favorable. Who knows? But for right now, stay focused on the economy. Infrastructure comes later, probably will favor industrials, but let’s take one thing at a time.
The outlook for volatility is likely — strong, you might say — as we get past Thanksgiving and closer to the beginning of December. The budget needs to be approved by December 3, and the Congress at some point needs to increase the debt ceiling. Without that increase in the debt ceiling, the U.S. would default, and nobody wants that to happen. The problem is that the budget and the debt ceiling increase, the most straightforward path to passing them, given the very tight margins in Congress, is with the reconciliation bill, and Congress also wants to throw in there a tax and spending bill, the so-called “Build it Back Better,” president’s name for it. And that bill is still very controversial, and it’s, even if they pass it in the House, it’s going to be difficult for the Senate to pass in its original version. It may go back into conference, back and forth, and that could put us right up against some deadlines. So don’t expect well, I don’t expect this to be a smooth process. We should expect some market volatility. But remember, these are just events. What we really want to stay focused on here is the economy, which we think will remain strong through next year. We like equities over bonds right now. We like the U.S. over international. We would stay focused on that.
Too soon to tell. It’s early. The travel restrictions were just eased a bit with some new rules. But honestly, if you go to other countries, the rules can be quite variable themselves and are subject to any new restrictions that may arise, if we have some new spikes of spikes in COVID infections. So it’s too soon to tell whether or not international travel will improve going forward. We think it’s more of a gradual process and this is just one step along that path.
Supply chains are the big problem right now. They’re creating lots of what I call friction. I mean that in a literal sense for the economy, because as you have the stocks in the shelves and the stores not really being full, then you end up with some inflation pressure. And that inflation is the friction in the economy, and that inflation pressure is going to linger as long as we have these supply chain disruptions. That’s probably going to go through most of the first half of next year, 2022, before we start to see inventories catching up, and then the inflation pressure recedes. I think you’ll begin to see goods on the on the shelves in stores begin to feel like they’re more full, more available. But it’s going to take some time. We have issues with inefficiencies where the number of cranes to unload a ship, a cargo ship, is not moving and not able to move fast enough to keep up with all the trucks that have lined up. And so you’re ending up with truck drivers quitting or walking away because they’re not getting paid to wait. There’s just all sorts of inefficiencies, and then there’s COVID itself, which closes down factories where we’re seeing some increase in infections right now in parts of China and in Vietnam, that’s part of the supply chain, and that’s going to limit factory output in Asia. We really need that output to keep the ships fully stocked, fully loaded, I should say, and coming to the United States. So whether it’s COVID or inefficiencies or just the sheer volume of spending that people want to do, we’re getting this mismatch between supply and demand that’s causing the friction and then the inflation. So again, look for that to revert back to something a little bit more normal in the second half of next year. Shouldn’t change our thinking about the market, though we still like stocks over bonds. We still like the U.S. over international in terms of equities.
So small businesses are maybe less able to find alternative suppliers or maybe they have fewer financial resources to do that sort of looking around. And that’s a negative for them. A positive for them, though, is that as prices go up, we are seeing some pricing power among small business. They are able to raise prices somewhat. And so that’s offsetting a lot of the costs increase that they’re seeing from their suppliers. And so, so far, it looks like margins are pretty healthy still. If inflation does continue, some of those firms may find it more difficult to raise prices. In that case, their margins would be hurt a little bit more. So it’s something to keep an eye on. But again, we are looking for inflation pressures to ease in the second half of next year. That should help small businesses.
Forecasts are not guaranteed and based on certain assumptions and on views of market and economic conditions which are subject to change.
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