December 2022 Market & Economic Outlook Report
New York - December 2, 2022 ~ 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 months full report below but be sure to register to join our December Market & Economic Outlook Webinar scheduled for Thursday, Dec. 8th at 1:30 pm ET where Jay Hatfield, CEO/CIO, provides even more recent updates and insights to this report and the changing market and economy.
We expect that there will be slow GDP growth in 2023 due to Fed tightening but no significant recession as the US economy is very resilient due to tailwinds from the end of the Pandemic and the 80% energy cost advantage the US has over the rest of the world. Nonetheless, The Fed continues to make major policy errors as it relies on lagging indicators such as CPI and the labor market to predict inflation instead of leading indicators such as the money supply and energy/commodity prices.
We are forecasting the November CPI will be down slightly on headline at .3% vs. .4% but core is likely to accelerate to .4% from .3% as shelter inflation is unlikely to decelerate due to BLS flawed methodology.
We expect the Fed to capitulate on their hawkish “entrenched” theory of inflation sometime during the first 6 months of 2023 just as they capitulated on their “transitory” theory of inflation in late 2021.
Stock Market Outlook:
We believe that the stock and bond markets have found a bottom and 2023 will be a strong year for stocks and bonds, with a year-end S&P 500 price target of $4,500 – representing a 18.5x P/E multiple on projected 2024 EPS of $245. We believe the US economy is very resilient relative to the rest of the world and will avoid a major recession in 2023. We also believe inflation is declining steadily and corporate earnings are likely to continue to be resilient. The Fed has decreased the money supply this year by 17%, which has caused the dollar to appreciate, mortgage rates to skyrocket, and oil prices to decline by 40%. This will set the stage for inflation to steadily decline over the next year.
The improvement in inflation is likely to accelerate in the 1st Quarter of 2023 as we approach the anniversary of the oil price shock of 2022 where oil went from $75/bbl to over $120/bbl. This decline will also reduce core inflation as there is a 5% bleed-through of energy price increases to core CPI. In the 1973 oil price shock, core PCE rose from 3.8% to over 9% within a year of the 150% oil price increase and during the 1979 200% oil price shock the core PCE rose from 6% to over 9%.
As we anticipated, the stock market rallied in Q4 2022 as inflation continued to decline, long term interest rates stabilized, and US elections are behind us. We are not concerned about quantitative tightening as the Fed already executed effective quantitative tightening through open market operations (reverse repo) and is now unwinding the reverse repo which is more than offsetting the balance sheet run-off and causing the money supply to grow instead of shrink.
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We expect that the 10-year treasury bonds will find a bottom in the 4% yield area and potentially rally into the 3-3.25% range. The Fed has reached a level of maximum hawkish rhetoric so can no longer drive long term rates higher with Fed speak (open market operations).
Global growth and demand for credit is 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 the German 10yr and Japanese bonds are near zero.
The monetary base shrank by almost $1 trillion or 17% so far during 2022 and the Fed’s short-term lending of treasuries and mortgages increased to $2.5 trillion over the last year. This is the most rapid decline in the monetary base since the great depression. It drove the dollar up more than 15% and pressured the prices of bonds and stocks.
We expect oil to trade in the $85-105 range while the Ukrainian war continues with European natural gas prices at the energy equivalent of oil being at $300/barrel. We recently reduced our target by $5 to reflect a very strong dollar as 80% of oil is produced and consumed overseas.
Margins for refining fuel oil hit a record of $86/barrel. Global oil prices are supported by the energy crisis in Europe, where natural gas is trading at the energy equivalent of oil being at $200/barrel. These unprecedented prices are pulling in all types of other energy as companies try to limit natural gas consumption.
US/Europe policy of limiting all hydrocarbons vs. focusing on coal is creating an unacceptable increase in total energy prices which could end the focus on climate change.
As of the end of November 2022, the Dow is down approximately 4%, the S&P 14%, the Nasdaq 28% and Bitcoin 65%. For 2023, we favor large cap dividend stocks such as large cap energy companies, utilities, and REITs.
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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.
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 prospectus for 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, regulation, 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 which 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 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.
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