You may have noticed higher prices on the things you buy regularly, like groceries and gas. However, many consumers may not realize that economic factors such as backed-up supply chains, extreme weather events, labor shortages/higher wages, and higher demand are not currently reflected in many consumer prices.
Why is that? In some cases, merchants and corporations are absorbing the extra costs rather than passing them on to consumers. In situations where that is impractical, some vendors have even removed goods from their shelves rather than pay or reflect those higher prices. For example, your local restaurants may have taken favorite dishes off the menu. In fact, some chicken wing specialty restaurants are having trouble sourcing their namesake dish.1
However, large coffee chains like Starbucks are not yet affected by occurrences like the unusual frost on Brazil’s Arabica bean crop last July, as only 5% of the price you pay for its coffee reflects the bean price.2 Your local coffee shop around the corner, on the other hand, may have to increase prices to cover that cost.
According to Morgan Stanley, by absorbing higher costs to keep consumers happy, company profits are taking a hit. If supply chain and labor shortages continue, it’s only a matter of time until investors are affected. It’s a matter of balancing the threat of inflation on consumer prices against the squeeze in profit margins.3
Investors need to be aware that these types of factors could eventually impact their portfolios. For example, if inflation continues to rise, the Federal Reserve may increase interest rates. If companies continue to absorb elevated costs, their earnings expectations will decline and thus, so might stock prices. That’s why it’s important to have an investment advisor who stays current with economic indicators and how they can impact market events. If we feel that any of our clients are over-exposed to vulnerable holdings or sectors, we let them know. Feel free to contact us whenever you want to discuss the current market environment.
If you’re worried about the impact of higher prices on your portfolio, you may want to consider adding an inflation hedge, such as precious metals. Morgan Stanley offers a good primer on the differences and benefits of gold and silver. It’s also important to remember that you don’t have to purchase the actual physical metals to diversify your portfolio, as they also are available via mining stocks, mutual funds, and exchange-traded funds.4
Given the potential for rising interest rates, some investors — particularly those nearing retirement — may want to consider repositioning high-risk assets into the bond market. In its latest market roundup, Morgan Stanley highlighted bond market opportunities that are less influenced by the direction of interest rates. Specifically, it recommends looking at U.S. high yield, mortgages and securitized assets, convertible bonds, and emerging markets.5
Content prepared by Kara Stefan Communications.
1 Tony Seskus. CBC. Sep. 7, 2021. “Why the price of chicken wings has taken flight.” https://www.cbc.ca/news/business/tight-market-for-chicken-wings-1.6155083. Accessed Sep. 29, 2021.
2 Matt Ott. The Detroit News. Sep. 29, 2021. “Why coffee could cost more at groceries, cafes.” https://www.detroitnews.com/story/business/2021/09/27/coffee-prices-explainer/5884425001/. Accessed Sep. 29, 2021.
3 Lisa Shalett. Morgan Stanley. Sep. 28, 2021. “Could Rising Costs Squeeze Corporate Profits?” https://www.morganstanley.com/ideas/earnings-season-cost-pressures. Accessed Sep. 29, 2021.
4 Morgan Stanley. Sep. 24, 2021. “Gold vs. Silver: Key Differences You Should Know.” https://www.morganstanley.com/articles/gold-vs-silver. Accessed Sep. 29, 2021.
5 Jim Caron. Morgan Stanley. Aug. 26, 2021. “Bond Market Opportunities After Peak Easy Money.” https://www.morganstanley.com/ideas/bond-market-outlook-2021-midyear. Accessed Sep. 29, 2021.
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