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Bend but don’t break: Why Supply Chains Matter

March 26, 2020by: [email protected]

By STEVE WHITTINGTON, CFA

By now, anyone reading this blog, anyone reading anything, anywhere knows about what our country is currently grappling with regarding our nation’s response to the arrival of the coronavirus, or COVID-19, in America, and the subsequent decline and volatility in our equity markets during most of March.  As a result of what’s happened so far, the outlook looks bleak for Americans through the rest of the spring and into the summer, most likely, as people brace for a “new norm” and terms like “social distancing” become a trending theme on social media.

One of the most resilient things about our free market economy is that our SUPPLY CHAINS are well developed while also being tactical.  That is, things we look to from abroad (i.e., imports) can shift if a disruption occurs in  a particular source market.   We saw that recently, and obviously, with China being practically shut down in the intermediate term by the crippling outbreak of the virus. As a result, U.S. companies were able to shift production and imports to other markets (albeit taking some financial hit in the near term) to keep supply chains intact.

The integrity of supply chains obviously comes into focus when we see an exogenous shock in the market, where business or governments are forced to scale back or even shut down, and financial markets shed wealth on fears that these companies won’t recover for some time. Americans may have been told to stay at home, but that doesn’t mean they won’t stop consuming.  A guy’s gotta eat, right?

And while our supply chain has definitely been disrupted, it has not disintegrated.  People can still get food.  People can still get most essential services and goods.  And unfortunately while some groups of workers have already felt the pain of  an unexpected reduction or shuttering of their businesses, Americans have proven to be  skillful, just like the supply chains they implicitly rely upon, to be able to feed their families.

Our supply chains may have buckled, but they have not broken because these distribution networks are dominated by the largest, best managed and highest capitalized countries in the world. These are some of the same companies  we buy for your portfolios at MONTAG. Further, with the impending and unprecedented fiscal stimulus package coming from our government, business’ will be somewhat cushioned (while still feeling some pain) and  greatly helped by these actions after the worst of this pandemic is over.

Americans, like the supply chains that serve them, are resilient and strategic.  That is an inspirational message to consider, as we work together as a nation to battle this crisis.

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