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The stock market has soared in short order for a variety of reasons, but one stands out as crucial: Kinks in the supply chain may have begun to ease.
The
S&P 500
has powered ahead to record highs in recent days for a gain of about 7% since Oct. 4, the low point seen in its September decline. Some strategists say that is because retail traders—those using popular platforms like Robinhood or TD Ameritrade—have bought the dip, encouraged by stocks’ recent tendency to quickly bounce back from losses. Companies turning in better results than expected is certainly not hurting.
But the prevailing force seems to be that problems in the supply chain appear to be easing. Freight costs are coming down, which indicates that bottlenecks are easing. The WCI Composite Freight Benchmark rate indicates the cost of a 40-foot shipping container fell about 9.5% from $10,500 in September to about $9,500 in October, according to RBC Capital Markets.
And the Baltic Dry Index, a benchmark for the cost of shipping raw materials such as grain by sea, has fallen almost 40% since early October.
Not only is that when stocks began rallying, but consumer-discretionary stocks—excluding internet ones—have outpaced the S&P 500 since then, according to RBC data. That could indicate manufacturers and retailers of consumer goods are having an easier time accessing the supplies needed to meet demand.
“We don’t think it is a coincidence that the week in which prices began to decline was also the week in which the S&P 500 bottomed,” Lori Calvasina, chief U.S. equity strategist at RBC, said in a Monday research note.
Earnings reports have shown signs that the supply issues are being resolved. Profit margins are a key factor behind companies’ unexpectedly strong results.
Aggregate third-quarter sales for the companies in the S&P 500 that have reported so far were 2% higher than expected, but earnings per share beat forecasts by 10%, according to
Credit Suisse
data. That means margins are much better than expected, which could indicate that companies’ costs for products are lower than analysts had penciled in.
If costs are truly becoming less burdensome, companies will have less incentive to raise prices. Inflation would be less of an issue, reducing the pressure on the Federal Reserve to raise interest rates in order to rein it in. The risk that rates would rise before the economy is on a firm footing would diminish.
That would be a win for stocks.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
Read More:The Stock Market Is Hitting Records Because Supply Chains Are Looking Healthier
2021-11-02 12:02:17