February 2023 Market & Economic Outlook Report
New York - February 1, 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 register to join our February Market & Economic Outlook Webinar scheduled for Thursday, Feb 2nd 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 are currently in a period of significant deflation. The Infrastructure Capital Real Time CPI (CPI-R) has been negative over the last 4 months, declining at an average annualized rate of over 4%, signaling that inflation has peaked and year-over-year CPI will continue to decline rapidly over the next 6-12 months. The Fed is likely to pause rate increases after the May meeting, which is likely to be a huge catalyst for both the stock and bond markets.
We forecast core PCE year-over-year will decline below 3% in June. The improvement in inflation is likely to accelerate in the 1st Quarter of 2023 as we anniversary the oil price shock of 2022 where oil went from $75/bbl to over $120/bbl. The Institute for International Economics forecasts that the Euro Zone will contract by 2% next year.
Housing prices started declining in July of 2022 and will eventually be reflected in the lagging BLS CPI index. The CPI shelter estimate has enormous lags due to outdated survey methodology and is currently reflected in CPI at an annual rate of 9.6%. There is a 70% correlation between housing prices and shelter increases 12 months later, so housing prices are a better reflection of inflation than the reported shelter numbers in CPI. CLICK HERE to go to the most recent adjusted real time CPI index report from Infrastructure Capital Advisors.
Stock Market Outlook:
Our 2023 year-end price target for the S&P is 4,500, representing an 18.5x 2024 EPS estimate of $245. We believe that the stock and bond markets have found a bottom and 2023 will be a strong year for stocks and bonds with gains of more than 10% as inflation declines rapidly in the first 6 months of the year and bond yields also decline.
There will be ongoing headwinds from misguided Fed policy and sluggish growth, which is likely to make the market volatile and probably range bound in the 3,800-4,200 range for the first 6 months of the year.
Our models show that the S&P is approximately fairly valued at 3,800, based on the current 10-year interest rate of 3.60%, implying no upside. But if the 10-year returns to a 3% yield, our target rises to 4,300.
The 30-year average default rate for preferred stocks according to Moody’s is ~.33%/year versus over 4% for high yield bonds. 2023 is likely to continue to be volatile with Fed tapering impacting liquidity, inflation continuing and growth slowing so we are focusing on adding large capitalization defensive dividend stocks and preferred stocks that have lower volatility and benefit from inflation. The higher yielding segment of the market has lower interest rate sensitivity and many issuers of preferreds benefit from inflation such as certain REIT subsectors.
Learn more about our investing strategy.
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 during 2023.
We estimate that future net quantitative tightening will be modest as bank reserves are now in line with pre-Pandemic levels. Most of the impact of Fed balance sheet reduction will be offset by a reduction in the Fed’s $2.5 trillion dollars of borrowing from banks (reverse repo).
Tight 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; we expect that such allocation will be rebalanced and reallocated into treasuries if yields are significantly above 3%, thus capping the potential rise in rates.
We expect oil to trade in the $80-100 range while the Ukrainian War continues, with European natural gas prices at the energy equivalent of oil being at over $150/barrel. The European energy crisis is likely to offset weak global demand for oil. The end of the China’s Zero Covid policy will result in a recovery of oil demand. We believe WTI to rise above $90 as we finish the winter heating season.
The key global energy/climate opportunity is to rapidly develop US natural gas transmission and export capacity of the US. There is a 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. Natural gas prices are now down 25% from the beginning of 2022 and 70% from the 2022 highs, which is highly deflationary as gas and electricity comprise half of the energy component of CPI and bleeds through to core CPI.
High European natural gas prices are driving fuel oil/distillate prices through the roof as distillate can be used as a substitute for natural gas and is easy to ship. Margins for refining distillates, including heating oil are near all-time highs at over ~$55.
Riskier tech stocks may outperform in the second half of the year, but are likely to be volatile during the first six months as the Fed pursues its overly aggressive monetary tightening and earnings are under pressure from unfavorable comparisons and a strong dollar.
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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 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