When a key shipping terminal in China completely shut down operations in August 2021 after a single employee was infected with COVID-19, the world’s already stretched supply chain felt the strain. When one cog in the global shipping mechanism is out of service, the time to transport vital goods and the cost to supply them increases.
Supply chain disruptions worldwide don’t just affect the delivery of key materials and products. They also impact the stock market, as many publicly-traded companies operate within the global supply chain. Here’s a glance at what investors may need to know regarding the supply chain bottlenecks around the world and how shortages impact investments.
TL;DR
- Global supply chain disruptions have impacted the production and delivery of goods across many industries in recent months.
- The COVID-19 pandemic is at the core of many supply chain issues. Strict pandemic protocols have shuttered ports and factories while some industries are having trouble finding workers.
- The global supply chain was designed to handle peak capacity for only a few months of the year. Once consumers exceeded capacity, disruptions grew more widespread.
- Out of 21 S&P 500 index companies that reported Q3 2021 results by October 8, 71% of them said the supply chain challenges had damaged earnings.
- China’s zero-COVID policy may force companies and suppliers to diversify away from Chinese production.
What’s happening with the global supply chain?
What do chicken, semiconductors, and food-grade CO2 have in common? There have been shortages of them all this year. Between COVID-19 protocols that shut down warehouses and shipping ports, worker shortages in key industries like trucking, and increased consumer demand for goods, suppliers haven’t been able to keep up.
There isn’t one single cause for the myriad supply chain hiccups, but rather several key factors that have worked together to compound the problem. One problem is COVID-19 itself: Some places, like China, have a zero-tolerance policy for infections and halt operations for even a handful of positive cases.
A truck-driver shortage has also come into play, as trucking companies struggle to hire enough employees to carry goods. Plus, prices of shipping containers are higher than normal, leaving companies at the mercy of high prices that put them out of competition.
For investors wondering how the supply chain impacts the stock market, it’s important to recognize that these challenges to a smooth global supply chain can affect many industries. Certainly, those that move goods—especially those that require hard-to-find materials like semiconductor chips—will be held back in earnings by the lack of materials.
John Butters, a senior earnings analyst with FactSet, noted that of the 21 S&P 500 index companies that had reported Q3 2021 results by October 8, 71% of them said the supply chain challenges had negatively impacted their earnings for that period.
What industries are impacted by the supply chain challenges?
Small businesses are feeling the pressure of supply chain issues. A U.S. Census Small Business Pulse survey conducted early in October 2021 revealed that 45% of businesses were experiencing domestic supplier issues.
The negative impact of the supply chain crisis has also trickled into earnings for many larger companies. FedEx presented lower earnings and a weaker outlook in its Q3 results, claiming the supply chain, as well as increased labor costs, were the culprits.
Supply chain disruptions impact all types of industries, which can be reflected in stock performance throughout the broader market. In September, the S&P 500 showed its largest monthly percentage drop since March 2020.
The world’s reliance on Chinese companies is a factor in the supply chain problems. Companies may be forced to shift their outsourcing to India and other nations, thanks to China’s strict COVID-19 protocols prompting closures and backlogs in production. Plus, an increasingly stern regulatory environment makes China a difficult landscape for large businesses.
Chief global market strategist at Invesco Kristina Hooper said in a recent note that the impact of supply chain disruptions will be temporary. Hooper added that low-margin companies like general retail, transportation, auto, and construction will continue to bear the brunt of the problem. Those with greater profit margins will suffer less, including technology and healthcare companies.
How will supply chain issues impact big corporations?
Larger companies like Amazon (NASDAQ:AMZN) and big-box retailers like Walmart (NYSE:WMT) may be better equipped to handle supply chain issues. The size of these businesses means they have more capital available to put towards solutions like keeping more inventory in stock.
Amazon says it has implemented changes to help ensure its customers can get the products they want in a timely manner, especially as the holiday season approaches. The company has been investing in inventory planning and supplier partnerships to address the issues of supplying goods as well as shipping them.
Amazon has also doubled its shipping container processing capacity by securing port space through ocean freight partnerships. Meanwhile, Walmart rented its own shipping containers for the holiday season to minimize delays and maintain e-commerce growth.
When will the supply chain issues be resolved?
Experts say the demand for consumer goods will eventually decline. That drop in demand will likely coincide with declining COVID-19 cases. As the pandemic eases, demand for goods is likely to decrease. Higher prices from inflation and shortages may account for a portion of this decline. So will the easing of pandemic restrictions, prompting consumers to spend more on in-person dining, entertainment, and sporting events.
Investors who are mainly concerned with long-term returns may benefit from a dose of patience as they await the resolution of supply chain issues. From a briefer perspective, retail investors may want to focus on growth stocks that are fairly immune to the effects of breaks in the supply chain (for instance, those that are digitally based and don’t require shipment of physical goods, like software as a service).
Should you invest in a shortage?
Some people invest in an industry that’s experiencing a shortage. This is because industry shortages can provide investment opportunities amid increased demand. By investing, traders are also contributing capital to promote expansion that ultimately works to satisfy the shortage. Profiting from this strategy is not a sure thing, but it’s a valid way to look at a shortage. Consider the overall circumstances of any shortage before investing.
Bottom line
The global supply chain has been massively disrupted due to the pandemic, and it’s not an issue that will resolve itself overnight. Investors should be aware that some industries will probably continue to lag in earnings for another few quarters. Still, they can take to heart the hope that supply chains will eventually return to their usual capacity.