Transcript

Amanda Agati:

In this edition of "Adding Alpha," we highlight what's at the top of our Christmas wish list for Santa.

Spoiler alert --it's the normalization of supply chain shortages and bottlenecks that really will be the key to forward progress for the markets and economy in 2022.

This has become an annual tradition for uschallenging ourselves to determine what could be the single most important catalyst to drive markets higher in the new year and putting that at the top of our wish list for Santa. 

Looking globally, the pandemic is still driving major supply chain disruptions.

It's still creating a staggered effect as bottlenecks form and surges of demand come back online.

We liken this phenomenon a little bit to rolling brownout effects with an electrical grid power outage, and that flickering on and off, largely in lockstep with COVID waves, is having important implications for pricing and inflation pressures,the timing of demand surges,shipping costs, and shipping-related delays, and even supply chain bottlenecks.

The Baltic Dry Index, the composite of dry bulk shipping costs across the globe, spiked almost 100% in the month of October.

And while the index has come back down a bit since then, it still sits 50% above its five-year average.

The ISM manufacturing report continues to show business supplier deliveries are well above their 10-year average, indicating slower delivery times. 

Similarly, the Empire State Manufacturing Survey Delivery Time Index is near its all time high.

Part of these stretched delivery times is really due to an increased lead time for semiconductors specifically.

And of course, this is a critical component in numerous durable goods. That lead time, the gap between initial order and final delivery, is sitting at a record 22.3 weeks according to Bloomberg data compared to before the pandemic in late 2019, when the lead time was approximately 12 weeks, or almost half of where it is today.

At the start of 2021, the expectation was for the semi shortage to stabilize by Q4.

Today, the consensus expectation is in the mid to latter part of 2022, so this phenomenon is going to be with us for much of this year.

We've heard a lot of reports lately, and especially in the last couple of weeks, that the transport industry has seen more virus-related restrictions and staffing issues amid the Omicron surge. And other companies have started to warn ahead of Q4 earnings season, which is just a few short weeks away,of more rising input cost challenges and labor-related difficulties.

The good news is some indicators are suggesting we are at or nearing peak supply chain pain.

Goldman Sachs' supply chain congestion scale showed the rate of congestion is not getting any worse.

Might not be getting much better, but at least it's plateauing at an elevated level, which is some forward progress.

While Deutsche Bank's bottleneck monitor showed a tentative easing in conditions in the US, most notably in seaborne freight, which has certainly garnered a lot of headlines lately.

The CDC also shortened its isolation policy for those infected by COVID from 10 days to 5 as long as those people are no longer experiencing symptoms.

From the market's perspective,that could allow people to return to work sooner, potentially helping to take some of the pressure off further supply chain disruptions here in the U.S.

As we begin 2022, global growth, while moderating, is still very much positive and could reaccelerate if we get a reprieve from supply chain bottlenecks and inflationary pressures.

This is just so critical in terms of the markets' and economies' paths forward and why it tops our wish list for Santa in 2022.