As noted above, more durable inflation is becoming clearer on the horizon, driven by hard-to-resolve supply chain issues and rising labor costs in particular. Wages are rising, particularly at the lower end of the spectrum of hourly workers, and we suspect many companies, as they report earnings, will be reporting on these challenges — perhaps to deflect from other operational missteps. That dynamic could lead to a difficult earnings season for some sectors, but not a difficult earnings season for others — especially those who supply goods or services that are rising in price faster than costs are rising. Where we see the most risk is in companies’ commentary on the future outlook. Companies will be conservative in announcing their revenue and earnings goals for 2022.
Many, of course, will ascribe justifiable blame to external conditions over which they had no control. With global economic data decelerating and many analysts downgrading their views on economic growth for the rest of 2021 and for 2022, we would not be surprised to see an earnings season generating overall mixed results — just in time to create a buying opportunity into year-end. That will be seasoned with a dose of conservatism from company executives about the outlook for next year. Some companies may initially suggest conservative growth expectations, and raise them as 2022 develops.
However, all in all, this environment is likely to be more difficult for stocks than what has followed the dramatic policy interventions of April, 2020. In our view, thorough research on specific companies and industries will be an important part of investing in coming months.
As noted above, while our long-term thematic interests remain focused in medical, software, and hardware technologies, we think the more sticky inflationary backdrop could be positive for many industrial companies and raw material suppliers such as commodities and energy. Heightened inflation will benefit precious metals and cryptocurrencies.
Uranium has seized some speculative attention, and we view it as an essential and enduring component of any realistic low-carbon future. We note a level of such realism creeping back into European energy policy, with mounting evidence of the instability wrought by prematurely shuttering coal and nuclear capacity in the UK and Germany, respectively, and a calm suggestion being made by Finland to incorporate more nuclear in the continent’s strategy.
SEC chair Gary Gensler may take some of the more rambunctious winds out of crypto’s sails; but we note that overarchingly, better regulation for the crypto space — including regulation of stablecoins, which have in the past been a source of anxiety and instability — is better for crypto and fintech innovators.
Thanks for listening; we welcome your calls and questions.
