New York - August 6, 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.
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AUGUST MARKET & ECONOMIC OUTLOOK WEBINARBe sure to register or attend our Monthly Market & Economic Outlook Webinar scheduled for Tuesday, August 13th 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 August and coming months. |
Top Headlines from Market & Economic Outlook Report:
We project that the US economy will avoid a recession despite the Fed’s policy error of not cutting rates in July. The bond market has eased for the Fed as the 80bp reduction in the 10-year interest rate is very likely to stabilize the housing market. The Fed is very unlikely to execute a 50bp cut. We project that the US economy will avoid a recession despite the Fed’s policy error of not cutting rates in July.
More than 100% of the uptick in the unemployment rate in July was due to weather impacts, indicating that the economy is still growing steadily but decelerating. We project that the US economy will avoid a recession despite the Fed’s policy error of not cutting rates in July
The Fed’s policy framework is overly rigid and needs to be reformed.
There is strong support during the seasonally weak Aug./Sept time frame for the S&P 500 Index at 5,000, which is the 200-day moving average. A rally to $6,000 is likely to take place in the 4th quarter as we get election uncertainty resolved.
Reiterate S&P 500 Index year-end price target of 6,000 on broadening AI boom and increased conviction on global rate cuts due to declining inflation and slowing economic growth. The rally to 6,000 is likely to take place after political uncertainty is resolved (See A. Stock Market Outlook, and B. Fed Outlook below for details)
We project that the election will be positive for the stock market as we are likely to have a divided government, which is usually positive for stocks as it tends to restrain spending and makes a significant corporate tax hike unlikely.
The math strongly favors the Republicans recapturing the Senate with the Democrats likely to retake the House. The presidential is impossible to forecast accurately as it will be a turnout-driven election, which cannot be polled.
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.
Pollution taxes are by far the most economic method to efficiently 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 E. for Oil/Environmental Outlook)
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 Summer Rate Cuts:
The stock market overreaction to the employment report is normal for the August/September time frame. We see strong support for the market in the 5,000 range for the S&P, which is the 200-day moving average. We are reiterating our 6,000 target on the S&P as Fed rate cuts drive increased liquidity in the capital markets and we get election certainty during the 4th quarter of this year.
For example, recent earnings reports and updates from NVDA, AAPL, ADBE, and AVGO validated our view that the AI boom is sustainable. During technology booms, it is optimal for companies with promising technology to become overvalued to attract capital and reduce the time to market.
Fed / Central Bank Outlook
The BOC and ECB rate cuts have 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 recommend that investors should actually “Not Fight the ECB” instead of following the cliche “Don’t Fight the Fed” in this cycle. ECB cuts are likely to force the hand of other central banks due to currency moves.
Europe represents 30% of the global money supply vs. the US at 23% and China at 20%.
We project that there will be a $2 Trillion Injection of Liquidity into the Global Money Supply during 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 in three times this year, starting in September, but should have cut in July due to a weakening economy.
Even this Fed will eventually realize obvious signs of slowing US growth
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.
The first quarter uptick in inflation was caused by the mismeasurement of shelter, an increase in energy prices, and ongoing supply shock in the vehicle repair and insurance sector.
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 proved 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:
The hyper cyclical housing market is weakening with the latest new homes sales report plunging 11.3% and inventory rose to 481k and is now at levels approaching the great financial crisis peak of 580k. There is 9.3 months of supply vs. an average of 6 months and a GFC peak of 12 months. The most recent housing start data was weak at 1.36MM units down from recent averages above 1.5MM.
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 80bp 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 validates the importance of corporate tax rates to global competitiveness.
A decline in personal consumption has never caused a US recession. Consumer spending is 95% driven by employment and wages. Consumer spending only declines when the decline in investment spending on housing and other durables leads to mass layoffs, which causes consumers to reduce spending.
The average post WWII recession had over a 10% decline in investment but personal consumption was on the average flat.
The Chips Act and other infrastructure spending from the government is very counter cyclical as it supports investment.
The Chips Act is an urgent national security priority as over 90% of advanced chips are produced in Japan.
If the Fed does not cut this year we likely to have a recession as both the housing sector and autos have started to show some softening.
Commodity Market Outlook:
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 constraint 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.
China’s Industrial Economy is Way More Resilient Than Perceived which Benefits Commodities:
China is the only major global economy that is loosening monetary policy. China increased its monetary base over $140 billion in September representing a 2.9% increase vs. a $300 billion drop in the Global Monetary Base.
China is projected to grow by 5% this year.
China saves 45% of GDP vs. less than 20% in the US, which results in much higher long-term growth as the critical driver of economic growth is savings and investment.
The property crisis is a concern, but if it starts to generate contagion, the central government is likely to intervene. The crisis impacts luxury goods companies vs. the industrial sector.
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 over runs. 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.
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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.
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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.
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Past performance is not indicative of future results.
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