New York - August 8, 2023 ~ The team at Infrastructure Capital Advisors has completed our new report providing key insights on current market conditions and economic outlook for this month and the coming months. See this month's full report below but be sure to join our Monthly Market & Economic Outlook Webinar scheduled for Thursday, August 10th at 1:30 pm ET where Jay Hatfield, CEO/CIO and portfolio manager will provide even more recent updates and insights to this report and the changing market and economy. Not registered for the webinar already? Click here to register. Also, by registering, we will send you a webinar playback video link if you are unable to join live.
Economic Outlook:
We expect the US economy to avoid a recession and executing a soft landing with economic growth to be 1-2% as credit tightens due to Fed policy and the ongoing bank crisis offset by post Pandemic tailwinds and the enormous decline in energy prices. The housing sector, which usually is the leading cause of recessions, continues to be resilient with an ongoing shortage of total homes for sale.
We do not expect the Fed to raise rates again as we expect that data over the next two months will show a softening labor market and continuing declines in reported inflation. We expect this fundamentally flawed Fed will be forced consider abandoning its "persistent/entrenched" theory of inflation and to acknowledge that inflation is declining rapidly, just as lagging data in late 2022 forced the Fed to abandon its disastrous "transitory" theory of inflation.
There are currently 7.9 million construction workers employed which is an all-time high and has been steadily rising during the Fed tightening. We expect this to continue due to the housing shortage and spending on infrastructure supporting the sector. Construction spending totals $1.8 trillion representing over 4% of GDP and is the most volatile of all sectors.
During the housing crisis of 2008 2.7MM construction workers, representing a 30% decline, and 2.0MM related manufacturing and transportation workers were also laid off, representing 2/3rds of the job losses during the great recession, and every post WWII recession has had large construction layoffs that on average caused a 14% loss of construction workers.
We project that the impact of the infrastructure bill, IRA, Chips Act and ARPA will add approximately $200 billion per year to construction spending, which should offset the slowing in construction of office buildings and other commercial real estate.
Stock Market Outlook:
Stock Market Outlook: We are currently cautious on the stock market as global interest rates continue to rise and we head toward the weak Fall season. We expect the S&P to be range bound in the 4,200-4,600 range during this difficult season. We remain bullish on the market in the 4th quarter of the year and have raised our target on the S&P to a range of 4,500-5,000 based on 19x 2024 EPS estimate of $240 on the low side of the target and under 21x at the high end. As the AI boom unfolds and many AI stocks move from being undervalued to becoming fully or over-valued the market may trade to the high end of our range.
We are expecting a normal seasonal pullback in the market starting in late August and lasting through mid-October, when 3rd quarter earnings season starts, although a Fed pause in September would be a positive catalyst.
The Dow is currently only trading at 17x 2024 earnings and only 16x non-tech eps, which is in line with our estimate of fair value multiple of 15.5X at a 4% treasury, indicating that the broad market ex-tech is fairly valued, with tech companies vulnerable to a pull back during the Fall.
The economy continues to be resilient and earnings estimates have only declined slightly.
Earnings estimates for 2023 and 2024 have only declined 3% and 2%, respectively this year
The Fitch downgrade of US debt did destabilize the stock and bond markets but did not reveal any new information or insights as almost all investors are painfully aware that Federal government spending is out of control.
Fears about treasury issuance post debt ceiling agreement could be unfounded as the Fed is likely to reduce reverse repo to offset the increase in Treasury cash.
We recommend that investors consider investing in preferred stocks to ride out the normal Fall storm:
Many preferred stocks benefiting from conversion to floating rate
We recommend SCE PRH and USB PRH
Active management of preferred stock is important as interest rate risk, credit risk and call risk need to be actively managed.
Bond Market Outlook:
We expect that the 10-year treasury bonds will rally into the 3-3.25% range during 2023.
Tighter Fed policy is likely to flatten the yield curve which will keep a lid on long term rates.
There are $52 trillion of global pension assets with only 28% allocated to bonds which will rebalance and reallocate into treasuries if yields are significantly above 3% capping the potential rise in rates
The Fed has reached a level of maximum hawkish rhetoric so can no longer drive long term rates higher with Fed speak (“Open Mouth Operations”)
Global growth and demand for credit likely to be sluggish in Europe due to the energy crisis, in China due to regulatory crackdown and in the US due to hawkish Fed policy and a large reduction in the government budget deficit. The US 10yr is 1.5% higher than German 10yr. and Japanese bonds are near zero.
Commodity Market Outlook:
We expect oil to trade in the $75-95 range while the Ukrainian war continues
Recent weakness in oil prices, driving prices below our range, were caused by tepid demand in China, fears of fallout from the banking crisis, and a slight increase in US production.
The ongoing European energy crisis likely to offset weak global demand for oil.
OPEC+ continues to support oil prices through production cuts.
The key global energy/climate opportunity is to rapidly develop US natural gas transmission and export capacity of the US.
There is an 70% discount of US natural gas prices relative to European prices.
Expanding natural gas consumption reduces the consumption of coal, and coal represents over 44% of global carbon emissions.
It is not possible for the US to stop using hydrocarbons as wind and solar only represent less than 6% of US energy production and are extremely difficult to expand rapidly as siting/NIMBY issues are huge barriers to expansion. The fastest way to reduce carbon emissions is drill for more natural gas which will displace coal.
Quick Tip:
2023 is likely to continue to be volatile with Fed tapering reducing liquidity, inflation continuing and growth slowing so we are recommending investors focus on adding large capitalization defensive dividend stocks and preferred stocks that have lower volatility and benefit from inflation.
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