Adapt, Rinse and Repeat

“The true sign of intelligence is not knowledge but imagination.”

~ Albert Einstein

Question: How are companies adapting to higher wages, inflation, and the COVID-19 Delta variant uncertainty?

Answer: As the second quarter 2021 earnings season ends with more than 96% of the S&P 500s market capitalization having reported earnings for the seasons, there has been a great deal of information available in the company reports. It is evident that companies have found new ways to operate post-Covid. Inflation has been a learning opportunity for many firms as they test pricing increases, and several companies are posting record net margins despite rising wages to attract workers.

Analyzing the fine print from earnings calls to gauge future guidance is so important. The headlines show frequent examples of healthy earnings growth, record sales and optimism. A deeper dive into the current environment and what the next chapter of the economic recovery may bring is an art rather than a science. As it unfolds, this will require real time analysis of many variables that we do not have clear, sharp, or well-defined explanations of at this time, including macroeconomic views and geopolitical situations. 

One looming question is when will we turn the page on COVID-19? As this is being written on August 15, we are waiting for earnings reports from Walmart and Target which will presumably reflect confidence in the return to work and return to school situations. Earnings growth in consumer goods have been spectacular since the start of the year. The importance of experiences and connectivity remains strong leading to the belief of a move towards the “old normal” and return to work. Yet concern over the Delta variant leads others to more moderate sentiments, increased volatility and uncertainty around the depth and breadth of the recovery. 

The bottom line is that COVID remains as a downside risk to the economy and earnings. Service industries such as travel and hospitality will provide leading indicators of how consumers will behave. The overall belief is that full scale lockdowns are unlikely. Most companies highlight that they’ve been resilient, finding ways to operate successfully in this new environment.    

Supply chain disruptions certainly placed inflationary pressures on many sectors that are beginning to lift. For example, Tractor Supply stated that it is starting to “see supply chain disruptions moderate a bit” with ongoing improvements expected in the next six to twelve months. Microsoft is even more positive, saying that the pandemic allowed them to revamp their sales, customer service, marketing, supply chains, and digital manufacturing with artificial intelligence (AI) and collaboration. The view is that the semiconductor shortage is a “huge opportunity to learn how to manage the supply chain differently” and better position themselves against a black swan event in the future. 

Attracting workers, especially for small business owners, remains problematic. There are a record 10 million job openings in the US labor market. Restaurants and retailers such as Ross Stores, TJ Maxx, Target, Walmart, Starbucks, Chipotle, and Kroger have all announced wage increases, bringing the average hourly wage for grocery and food beverage workers to approximately $15 per hour for the first time. Despite rising wage costs, corporate margins are at record highs— which companies like Starbucks attribute to heightened productivity and “continued investment in digital initiatives and operational efficiencies” that “further solidify the foundation” for future growth. Improvements in the labor market with added jobs and wage growth may boost the spending power of consumers allowing the Fed to begin tapering monetary support sooner than later. 

Inflation in a strange way helped corporate earnings with price increases being absorbed by consumers. As supply chain disruptions improve and inventories increase, inflationary pressures should subside by year end. Meanwhile, consumers feel the brunt of the increased prices and ultimately adjust behavior to match their reality. Stay focused and plan accordingly. 

The opinions expressed are those of the writer as of August 15, 2021, but not necessarily those of Raymond James and Associates, and subject to change at any time. Mention or reference to any specific company is not an endorsement and only intended to be used for illustrative purpose and refence. Past performance does not guarantee future results. Every investor’s situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. Past performance may not be indicative of future results.

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This article provided by Darcie Guerin, CFP®, Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at (239)389-1041, email darcie.guerin@raymondjames.com. Website: www.raymondjames.com/Darcie.