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Accelerating Capital Spending is to be Expected

April 1, 2022 | Commentary

  • The Ukraine invasion has added another layer of risk and uncertainty to a world severely disrupted by COVID.  Supply chains have been fractured. The labor market is stretched drum tight.  Addressing these challenges will take massive new investments.
  • Capital expenditures, or CAPEX, are highly cyclical, contracting in recessions and growing in recoveries.  The recovery after the Great Financial Crisis was perhaps slower than in earlier periods because companies were investing abroad to lower costs.  Globalization was the norm. This trend is over.
  • CAPEX is accelerating to remove uncertainties from the supply chain. Major expenditures on education and training, which are not captured in GDP accounting as CAPEX investments, are also being made to help close the labor market gap.  It would not be a surprise if CAPEX jumped above historical averages for the next several years, creating momentum through its positive multiplier effect on GDP.
  • Ukraine has raised major risks and uncertainties not previously understood or acknowledged.  Investors should not focus solely on these risks and ignore the tailwinds in the economy. Long-term target equity allocations should be maintained.

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