New York - October 7, 2024 ~ 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.
Scroll to read full report or click below to skip to specific sections:
October MARKET & ECONOMIC OUTLOOK WEBINARBe sure to register or attend our Monthly Market & Economic Outlook Webinar scheduled for Thursday, October 10th at 1:30 pm ET. In the webinar, Jay Hatfield, Infrastructure Capital Advisors CEO and Portfolio Manager, will walk you through updated market commentary, economic outlook, and promising markets' high-yield performance for October and the coming months. SIGN UP! |
Top Headlines from Market & Economic Outlook Report:
The monetary base is down $30bn YoY (approximately 0.60%). Typically, the monetary base grows by approximately 5% YoY, growing at less than 1% indicating that the Fed’s monetary policy maintained restrictive to keep rates high.
This also indicated that the Fed has massive headroom to lower rates and increase the monetary base
We estimate that a full-scale war with Iran that interrupted oil exports of 3MM per day would likely cause global oil prices to rise to over $90 per barrel to bring the global oil market into balance. Stocks are vulnerable as we are at all-time highs and valuations are stretched prior to the election.
The recent rate cut in China validates our bullish view on the global stock and bond markets as the Global Monetary Base (www.infracapfunds.com) expands rapidly.
The market has cut rates for the Fed. The 100bp reduction in the 10-year interest rate over the last six months has stabilized the housing market. We project that the economy will grow 2-3% this year (No Landing).
We believe the “Sahm” rule is not useful for predicting recessions as it follows a lagging indicator (unemployment). We follow the “Hatfield Rule” which states that a recession is indicated by housing starts (leading indicator) dropping below 1.1MM units. The recent increase in starts to 1.35MM from 1.25MM last month validates our view that we are not heading into a recession.
The recent 100bp decline in rates validates our non-consensus view that global monetary policy is far more important than ongoing Federal fiscal irresponsibility in determining rates.
The Fed is very unlikely to execute another 50bp cut this year as there are no signs of a recession, only a moderation in growth, and the Fed has limited ability to forecast inflation or economic growth, so it is likely to proceed cautiously. The first 50bp cut was an acknowledgment that the Fed made a policy error by not cutting rates in July and was bullish as it is the first time in 4 years that the Fed has exercised judgment vs. following rigid, outdated rules.
We project that the election will be positive for the stock market as we are likely to have divided government utilizing gambling odds (80% probability divided, 12% Rep. sweep, 8% Dem sweep), which is usually positive for stocks as it tends to restrain spending and makes a significant corporate tax hike unlikely.
Trump should pair his proposed import tax increase with a major tax cut such as eliminating income taxes for those making under $50,000 rather than focusing on irrelevant tip tax.
Reiterate S&P 500 index year-end price target of 6,000 with risk to our target heavily biased to the upside and downside risk driven by potential democratic sweep due to associated corporate and cap gains taxes. The rally to 6,000 or above is likely to take place as we head into earnings season and get more clarity on the election.
A democratic sweep would imply a 25% corporate tax rate ( A compromise from Harris 28% proposal) which drops our theoretical year-end target by 10% to 5,400 due to both a drop in earnings and a multiple drop as earnings growth is a function of the after-tax return on capital.
A democratic sweep would also likely result in a large increase in the capital gains rate that would trigger a wave of selling this year as 12/31/24 is likely to be the cut-off date for the increase, which could drive the market below our 5,400 target.
A Republican sweep that lowers the corporate tax rate to 15% would raise our year-end target to 6,700.
Cutting corporate taxes is the most critical economic growth driver. Corporate taxes are 60% correlated with GDP growth.
The Fed’s policy framework is overly rigid and needs to be reformed.
Pollution taxes are by far the most economic method to rapidly reduce carbon and improve the environment. Limiting natural gas production is highly destructive to the global environment and has led to regime change in Europe (See Commodity Outlook).
Recent oil price weakness is due to seasonal factors not economic weakness in China or growth fears.
Stock Market Outlook:
Raised S&P 500 index target from 5,750 to 6,000 based on AI Boom, resulting increase in S&P EPS estimates and long-term growth rate, and Increased Conviction on Global Rate Cuts:
We believe recent earnings reports and updates from NVDA, AAPL, ADBE, and AVGO validated that the AI boom is sustainable at the end-user level. During technology booms, it is optimal for companies with promising technology to become overvalued to attract capital and reduce the time to market.
We are forecasting rate two additional cuts in November and December, which will be a big catalyst for the stock market during the 4th quarter.
Fed / Central Bank Outlook
The BOC and ECB rate cuts has started the global wave of rate cuts and will put pressure on other central banks to cut as currency moves reduce the growth of countries slow to cut.
We project that there will be a $2 Trillion Injection of Liquidity into the Global Money Supply in 2024:
Most investors do not appreciate that central banks cannot mandate rate cuts and must inject liquidity into the banking system, which normally causes powerful rallies in both stocks and bonds. When the global monetary base (see www.infracapfunds.com) is expanding it is almost always bullish for stock and bond markets.
We forecast that the Fed will cut rates 25bp two more times in 2024.
Inflation does not magically re-ignite or become “sticky’. Inflation is caused by excessive monetary stimulus and supply shocks. Current inflation is 1.5% if one utilizes market prices readily attainable from internet rental services.
Investors tend to overestimate the magnitude of Federal budget problems as they ignore the impact of Fed purchases of treasuries due to past QT and ongoing growth of the money supply and associated purchase of bonds.
Correcting for the Fed’s normal purchase of treasuries due to the expanding money supply, the Federal budget deficit is 4.5% of GDP which is sustainable given that nominal GDP growth averages 5%.
Fiscal irresponsibility does reduce potential GDP growth by approximately 1% due to crowding out of private investment.
Recent declines in oil prices are bullish for inflation prints for the rest of the year as energy prices bleed into the core at approximately a 5% rate.
The Fed’s policy framework needs to be reformed.
The Fed’s 2% target has been shown to be too low by academic research and the Core PCE index is highly flawed as the Shelter component lags by 18-24 months by design (6-month lag) and due to the inclusion of lease renewals vs. new leases. The Fed should also adopt a nominal wage growth target and an employment target.
Economic & Bond Outlook:
Political Outlook
The math strongly favors the Republicans recapturing the Senate by taking West Virginia and Montana with the Democrats likely to retake the house due to NY redistricting and pro-choice suburban women turnout. The presidential is impossible to forecast accurately as it will be a turnout-driven election.
Instead of both candidates focusing on the taxation of tips, both candidates should pledge to eliminate income taxes on those making less than $50,000.
The hypercyclical housing market was weakening with June new homes sales report plunging 11.3%, but after the dramatic decline in interest rates new home sales surged to a year high of 739k. In addition, homebuilders have indicated a surge in buyer traffic in July and August.
11 out of the last 12 recessions were precipitated by a collapse in the hyper-cyclical housing sector. We have been forecasting for the last three years that the US economy would not go into a recession due to the shortage of housing in the US, but as noted above the housing sector is cooling and the US could enter a mild recession if the Fed does not cut rates this year.
We do not expect a recession as the housing sector is likely to stabilize after the recent 100bp drop in the US 10-year rate.
Cutting corporate taxes is the most critical economic growth driver. Corporate taxes are 60% correlated with GDP growth.
Greece cut corporate taxes from 28% to 22% and economic growth surged.
Ireland has one of the lowest corporate tax rates in the EU and the highest economic growth rates.
The US has outperformed other OECD economies since cutting corporate tax rates to competitive levels in 2017.
Attempts to implement a global minimum corporate tax validate the importance of corporate tax rates to global competitiveness.
Commodity Market Outlook:
The White House announced today that Iran was preparing to launch ballistic missiles on Israel. Oil prices reversed losses and are now up 3% to over $70 per barrel, and stock prices were down over 1% with treasuries rising .5% on a flight to safety.
We estimate that a full-scale war with Iran that interrupted oil exports of 3MM per day would likely cause global oil prices to rise to over $90 per barrel to bring the global oil market into balance. Stocks are vulnerable as we are at all-time highs and valuations are stretched prior to the election.
Pollution taxes are by far the most economic method to efficiently reduce carbon and improve the environment. Taxes on mercury, SoX, NoX, and coal ash would cause most global coal-fired power plants to close and dramatically reduce carbon and toxic emissions.
Recent Oil Price Weakness Driven by Seasonal factors and Negative OPEC Sentiment:
We maintain our $75-95 range estimate for oil in 2024 as continued production constraints from OPEC+ and steady demand growth support the price.
Middle East war providing only modest support to the oil market.
We attribute the recent weakness to seasonal/weather factors partially.
December of 2023 was the warmest in 150 years.
The utopian vision of an all-electric economy has now completely imploded as average consumers have limited interest in all-electric autos, and renewables development falters due to nimby opposition to offshore wind and massive cost overruns. Europe’s failed energy transition is likely to exacerbate a recession and lead to regime change in many countries.
The failed attempt to push an all-electric vision has hurt the environment as there was less focus on hybrid electric cars and using natural gas to supplant coal.
Follow InfraCap on Social Media
Follow InfraCap on social media for announcements on new market reports, exclusive webinars monthly market & economic outlook reports along with many other current market updates or insights plus InfraCap fund news at:
Want faster market insights and updates?
Follow Jay Hatfield's Twitter account for instant updates and insights as he sees important changes and information occurring in the US market and economy. twitter.com/jdhatfield_icap.
ABOUT US
Infrastructure Capital Advisors, LLC (ICA) is an SEC-registered investment advisor that manages exchange-traded funds (ETFs) and a series of hedge funds. The firm was formed in 2012 and is based in New York City. ICA seeks current income opportunities as a primary objective in most, but not all, of ICA's investing activities.
DISCLOSURE
Not for distribution to the public. Opinions represented above are subject to change and should not be considered investment advice. Past performance is not indicative of future results. The links to the fund fact sheets will provide standardized performance and risk disclosures.
FUND RISKS Investors should consider each Fund's investment objectives, risks, charges, and expenses carefully before investing. For a prospectus with this and other information about the Fund, please visit the Fund's webpage. Please read the prospectus carefully before investing.
ICAP Exchange Traded Funds (ETF): Investing involves risk, including possible loss of principal. An investment in the Fund may be subject to risks which include, among others, investing in equities securities, dividend-paying securities, utilities, small-, mid- and large-capitalization companies, real estate investment trusts, master limited partnerships, foreign investments and emerging, debt securities, depositary receipts, market events, operational, high portfolio turnover, trading issues, active management, fund shares trading, premium/discount risk and liquidity of fund shares, which may make these investments volatile in price. Foreign investments are subject to risks, which include changes in economic and political conditions, foreign currency fluctuations, changes in foreign regulations, and changes in currency exchange rates which may negatively impact the Fund's returns. Small and Medium-capitalization companies, foreign investments, and high-yielding equity and debt securities may be subject to elevated risks. The Fund is a recently organized investment company with no operating history. Please see the prospectus for a discussion of risks. Distributor, Quasar Distributors, LLC
PFFA Exchange Traded Funds (ETF): The value of an ETF may be more volatile than the underlying portfolio of securities the ETF is designed to track. The costs of owning the ETF may exceed the cost of investing directly in the underlying securities. Preferred Stock: Preferred stocks may decline in price, fail to pay dividends, or be illiquid. Non-Diversified: The Fund is non-diversified and may be more susceptible to factors negatively impacting its holdings to the extent that each security represents a larger portion of the Fund’s assets. Short Sales: The Fund may engage in short sales, and may experience a loss if the price of a borrowed security increases before the date on which the Fund replaces the security. Leverage: When a Fund leverages its portfolio, the value of its shares may be more volatile and all other risks may be compounded. Derivatives: Investments in derivatives such as futures, options, forwards, and swaps may increase volatility or cause a loss greater than the principal investment. No Guarantee: There is no guarantee that the portfolio will meet its objective. Prospectus: For additional information on risks, please see the Fund’s prospectus.
PFFR Exchange-Traded Funds (ETF): The value of an ETF may be more volatile than the underlying portfolio of securities it is designed to track. The costs of owning the ETF may exceed the cost of investing directly in the underlying securities. Preferred Stocks: Preferred stocks may decline in price, fail to pay dividends, or be illiquid. Real Estate Investments: The Fund may be negatively affected by factors specific to the real estate market, including interest rates, leverage, property, and management. Industry/Sector Concentration: A Fund that focuses its investments in a particular industry or sector will be more sensitive to conditions that affect that industry or sector than a non-concentrated Fund. Passive Strategy/Index Risk: A passive investment strategy seeking to track the performance of the underlying index may result in the Fund holding securities regardless of market conditions or their current or projected performance. This could cause the Fund’s returns to be lower than if the Fund employed an active strategy. Correlation to Index: The performance of the Fund and its index may vary somewhat due to factors such as Fund flows, transaction costs, and timing differences associated with additions to and deletions from its index. Market Volatility: Securities in the Fund may go up or down in response to the prospects of individual companies and general economic conditions. Price changes may be short or long-term. Prospectus: For additional information on risks, please see the Fund’s prospectus.
AMZA Exchange Traded Funds (ETF): The value of an ETF may be more volatile than the underlying portfolio of securities the ETF is designed to track. The costs of owning the ETF may exceed the cost of investing directly in the underlying securities. MLP Interest Rates: As yield-based investments, MLPs carry interest rate risk and may underperform in rising interest rate environments. Additionally, when investors have heightened fears about the economy, the risk spread between MLPs and competing investment options can widen, which may have an adverse effect on the stock price of MLPs. Rising interest rates may increase the potential cost of MLPs financing projects or cost of operations, and may affect the demand for MLP investments, either of which may result in lower performance by or distributions from the Fund’s MLP investments. Industry/Sector Concentration: A fund that focuses its investments in a particular industry or sector will be more sensitive to conditions that affect that industry or sector than a non-concentrated fund. Short Sales: The Fund may engage in short sales, and may experience a loss if the price of a borrowed security increases before the date on which the Fund replaces the security. Leverage: When a Fund leverages its portfolio, the value of its shares may be more volatile and all other risks may be compounded. Derivatives: Investments in derivatives such as futures, options, forwards, and swaps may increase volatility or cause a loss greater than the principal investment. MLPs: Investments in Master Limited Partnerships may be adversely impacted by tax law changes, regulations, or factors affecting underlying assets. No Guarantee: There is no guarantee that the portfolio will meet its objective. Performance Data: Performance data quoted backtested results. Backtested Performance was derived from the retroactive application of a model developed with the benefit of hindsight. Backtested performance is no guarantee of future results and current performance may be higher or lower than the performance shown. Investment return and principal value will fluctuate so your shares, when redeemed, may be worth more or less than their original cost. Please visit https://www.virtus.com/products/virtus-infracap-us-preferred-stock-etf#shareclass.742/period.quarterly for performance data current to the most recent month-end and the Fund’s standard performance information. You should consider the Fund’s investment objectives, risks, charges, and expenses carefully before investing. For PFFA, PFFR, and AMZA funds, contact VP Distributors LLC at 1-888-383-4184 or visit www.virtusetfs.com to obtain a prospectus that contains this and other information about the Fund. The prospectus should be read carefully before investing.
Virtus ETF Advisers, LLC serves as the investment advisor, and Infrastructure Capital Advisors, LLC serves as the sub-adviser to PFFA, PFFR, and AMZA. These three funds are distributed by VP Distributors, LLC, member FINRA, and a subsidiary of Virtus Investment Partners, Inc.
Past performance is not indicative of future results.
The links to the fund fact sheets will provide standardized performance and risk disclosures.
© 2023 Infrastructure Capital Advisors, LLC
Commentaires