Key takeaways
Investors are closely watching how recent global developments may impact goods flowing through the supply chain.
A short-lived U.S. longshoreman’s strike contributed to limited supply chain bottlenecks.
Escalating Middle East tensions raise concerns about energy production disruptions.
In early October 2024, a U.S. longshoreman’s strike and escalating Middle East tensions contributed to supply chain worries. While the strike was temporarily suspended after only a matter of days and dockworkers returned to work, tensions in the Middle East only escalated. Both matters put the supply chain back in the spotlight. The most notable concern is whether it could impact prices, and potentially trigger rising inflation. This occurs just as the Federal Reserve (Fed) is finally cutting interest rates, satisfied that inflation is trending toward the Fed's target 2%.
Approximately 45,000 Eastern Seaboard and Gulf Coast International Longshoreman’s Association workers went on strike October 1, 2024, following a breakdown of contract negotiations. It was the first strike affecting these ports in 47 years.1 The walkout did not affect West Coast ports. Three days after walking out, workers returned to the job after reaching terms that suspended the strike until January 15, 2024.
“The biggest concern wasn’t the strike action itself, but the possible duration of the strike,” says Rob Haworth, senior investment strategy director for U.S. Bank Asset Management. “Since the strike is suspended but the contract is not yet settled, it’s still an issue in the back of the market’s mind.”
“The biggest concern wasn’t the strike action itself, but the possible duration of the strike,” says Rob Haworth, senior investment strategy director for U.S. Bank Asset Management. “Since the strike is suspended but the contract is not yet settled, it’s still an issue in the back of the market’s mind.” Haworth says labor’s demands for increased wages may contribute modestly to inflation pressures. However, he notes, “supply chain disruptions owed to striking dockworkers are off the table at least until early 2025.”
Fears of a widening Middle East conflict have been evident since the October 7, 2023, attack on Israel by Hamas. This led to Israel’s retaliatory attack on the Gaza Strip. At the same time, Hezbollah fighters based in neighboring Lebanon also presented a threat. In early October 2024, fighting escalated between Israel and Iran-backed Hezbollah, adding to fears of a larger regional conflict.
The Middle East’s prominent oil production role raises questions about whether oil supplies might be affected, but Haworth says to this point, it’s not clear whether significant price hikes will materialize. “Oil prices today (at the $75/barrel range) are near the low end of what we’ve seen in the last year-and-a-half.” By contrast, Haworth notes that in February 2022, the early days of the Russia-Ukraine war, oil prices reached $120/barrel.2
Falling energy prices played a major role in inflation’s decline from a peak of 9.1% for the previous 12-month period as of June 2022, to 2.5% for the 12-months ending in August 2024, as measured by the Consumer Price Index.2 Haworth says another favorable factor affecting oil supplies is the likelihood that Organization of Petroleum Exporting Countries+ (OPEC+) will expand oil production before year’s end. “The combination of relatively soft demand combined with the potential for an uptick in supplies if OPEC+ increases production is likely to make any upturn in oil prices short-lived,” says Haworth.
Reduced goods demand contributes to less threatening supply chain issues. This differs from the COVID-19 pandemic’s early days, when consumers ramped up goods spending. As a result, the global economy faced a shortage of commodities, parts or products that led to supply-demand imbalances. “Higher inflation reflected a restricted supply of goods at the same time that there was strong demand for many of those same goods,” says Tom Hainlin, national investment strategist at U.S. Bank.
The worst of these challenges have subsided. Manufacturer supplies improved and consumers today find most goods readily accessible. The economy also transitioned from one driven by demand for goods to increased spending on services, including travel and entertainment.
As the chart indicates, the rate of U.S. goods spending, which in 2020 jumped significantly, shows little change over the past two years.
Although supply chain challenges may be elevated, “We’re not at the same point we were during the peak of supply chain issues a few years ago,” says Haworth, “but there are some risks.” Haworth notes that while goods demand is relatively flat, “We also aren’t seeing stockpiling of inventories, so if demand suddenly picked up, it might require a production ramp-up.”
Persistent consumer demand and a strong job market continue to influence economic growth. Investors will closely monitor these data points in the months ahead to determine the impact on corporate profits and stock prices.
Talk with your wealth planning professional to determine how economic developments such as inflation trends may impact your own investment strategy and your long-term financial goals.
If disruptions in the supply chain result in a situation where demand for products or services outstrips available supplies, it can result in significant price increases for affected items. For example, consumer demand for goods soared in 2020 and 2021, during the early months of the COVID-19 pandemic when activities (such as entertainment events) were limited. Manufacturers were not able to meet demand for a variety of reasons, including increased consumer demand and shortages of available materials. As a result, costs for some items jumped, and the broader inflation rate surged. This affected monetary policy (higher interest rates) that may have had a dampening effect on the economy.
Specific sectors of the market can be subject to supply chain issues. If supplies for certain items are restricted for a period of time, it can impact the ability of companies within related sectors to meet customer demand. That could result in lower revenues and earnings, a development that could potentially be reflected in lower stock prices.
If specific types of products become scarce due to supply chain disruptions, consumers may not be able to readily obtain them or will have to pay an inflated price for them. This is similar to the issue that occurred with building supply prices in the early days of the COVID-19 pandemic. Demand for housing and home renovations surged, straining available supply, resulting in major price increases for lumber and related materials.
Declining – yet persistently elevated – prices continue to weigh on consumers and policymakers alike.
The Federal Reserve cut interest rates in December for the third time in a row, lowering rates a total of 1% in 2024.
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