October 15, 2021

The Chain


Bottom Line:


Stocks climbed higher during the week as the first batch of companies reporting quarterly earnings beat estimates, led by financial institutions and retailers. Companies are projected to report big growth numbers and validate stock market valuations. While the earnings releases are important, we are also closely watching the forward guidance and potential negative impacts including supply chain disruptions.



The Full Story:


Capital markets had plenty of data to digest this past week, starting with the true onset of third quarter earnings season. The big banks including JPMorgan, Citigroup, Bank of America, Wells Fargo, and Morgan Stanley all reported on Wednesday and Thursday. Headed into earnings releases, there were some lingering concerns that recent moves higher in interest rates (over the last 2 months, the 10-year U.S. Treasury yield has risen from 1.26% to 1.52%) might have pushed bank stocks too high. The banks were also losing the catalyst of COVID volatility, which can drive trading and transaction revenues. But the major Wall Street banks delivered the opposite result.


Across the four large US banks (excluding Wells Fargo), trading revenues in fixed income, currencies, and commodities were 3.3% higher than estimated, equity market trading was more than 20% higher than estimated, and investment banking fees for dealmaking produced huge revenue numbers, more than 20% above estimates. Last, the quality of loan books continues to improve which lowers credit costs and charge offs. Approximately half of loan loss reserves accumulated for pandemic-related defaults have been reversed.



We don’t necessarily want to put too much stock (literally) into the banks’ earnings outperformance, but it could be a good sign. The stock market had a positive reaction as well. The S&P 500 index rose 0.3% on Wednesday and 1.7% on Thursday after two negative trading days to start the week.


The S&P 500 is expected to report year-over-year earnings growth of 27.6% for the third quarter, per FactSet data. Given that most companies report actual earnings above estimates, what is the realistic projection for the quarter? Based on the 5-year average improvement in seasonal earnings growth due to companies reporting positive earnings surprises, it is likely the index will report earnings growth of nearly 35% for the third quarter, which would be the third consecutive quarter of year-over-year earnings growth above 30%.


What Could Hurt the Good Vibes?


Supply chain disruptions were the #1 complaint as of last week. It’s a small data set, but 71% of companies that have reported so far have mentioned supply chain disruptions as a factor that either had a negative impact on earnings or revenues in Q3, or is expected to have a negative impact on earnings or revenues in future quarters. After supply chain disruptions, labor shortages & costs, COVID costs & impacts, and transportation & freight costs were the next most cited issues and in that order. All could have an impact on prices of durable and non-durable goods and create inflationary pressures, especially as the holiday season approaches for retailers.


The headline problem is a traffic jam at our busiest ports in Los Angeles and Long Beach, which together process more than one-third of U.S. goods imports. “After dropping to less than 10 in June, the number of ships waiting in San Pedro Bay to unload peaked at 73 on Sept. 19. By the end of September there were still 67,” per Jeffrey Kleintop, Schwab’s chief global investment strategist. “Most were coming from China and took about 14 days to cross the Pacific—but then had to wait as long as several weeks for an opportunity to unload and get put on trucks.”


Of course, the jam was originally caused by COVID-19 forces causing massive shifts in supply and demand, but now the underlying problem is shortages of longshoremen and truckers to haul goods to their final destinations. The backlog has pushed shipping costs to extreme levels, with the spot rate for a 40-foot shipping container from Shanghai to Los Angeles rising from about $3,500 last year to $12,500 as of the end of September.



The consumer discretionary sector faces the strongest headwinds because these companies, which include retailers, autos, clothes, luxury brands, home improvement, etc., rely heavily upon imports. The backlog could disrupt year-end performance by driving up costs and depriving them of seasonal surge spending; however, markets are forward looking. The Consumer Discretionary Sector ETF (XLY) has returned +2.9% over the trailing 3 months and +16.3% year-to-date. The resilient performance shows that investors are looking beyond this crunch and reflecting optimism that supply chain disruptions will unwind.


You would never break the chain (Never break the chain)

Chain keep us together (running in the shadow)




Investors that are not as optimistic (or not fans of Fleetwood Mac) should look to international stocks to partially offset some of the risk. European business leaders made relatively fewer mentions of shortages hurting their businesses over the summer than their U.S. counterparts. Europe’s supplier delivery times improved slightly, while those in the U.S., U.K., and Japan worsened. Last, inflation pressures are lower in Europe than in the U.S.


Have a great Sunday!


Timothy W. Ellis, Jr., CPA/PFS, CFP®

Senior Investment Strategist, Wealth Strategist


Sources: Bespoke Investment Group, FactSet, Charles Schwab, JPMorgan

Author: Senior Investment Strategist Wealth StrategistSince joining W&A in 2014, Tim has been responsible for managing relationships with clients and providing financial planning services covering the areas of retirement, income tax, estate and gift, risk management, and education. In addition to client responsibilities, Tim serves on the firm’s investment committee assisting in portfolio construction and allocation as well as the searching and vetting of portfolio strategies. He is also an occasional author of W&A’s Weekly Strategic Insight commentary. Tim received his Bachelors in Accountancy and Masters in Taxation from the University of Mississippi in 2008 and 2009, respectively. He completed the CPA exam in 2011 and is a licensed CPA in the state of Tennessee. He earned the CERTIFIED FINANCIAL PLANNER™ (CFP®) certification in 2014 and Personal Financial Specialist (PFS) credential in 2015. After completing his Masters at Ole Miss, Tim started his career at Reynolds, Bone & Griesbeck PLC as a tax associate in 2009. While at RBG, Tim worked with a wide range of clients, performing tax compliance and planning services for individuals, estates, trusts, partnerships, and corporations. Tim is a member and/or serves on the following organizations: • The American Institute of Certified Public Accountants • The Tennessee Society of Certified Public Accountants (Council member and VP of Programs and board of directors for the Memphis Chapter) • The Financial Planning Association (President-elect and board of directors for the Greater Memphis Chapter) Tim is originally from Marks, Mississippi, but has lived in East Memphis since starting his career. He is married, and he and his wife, Mary Agnes, are the proud parents to a son, Wilkes, daughter, Edie, and Goldendoodle, Penny.


Timothy W. Ellis, Jr., CPA/PFS, CFP®

Senior Investment Strategist

Wealth Strategist

Sign up to receive the weekly W&A Weekly Strategic Insights in your email.