July 2022 Market Commentary and Economic Outlook Report
The team at Infrastructure Capital Advisors provides key insights and advice on current market conditions and economic outlook for July 2022 and the coming months. Review below but be sure to register to join our July Webinar where Jay Hatfield reviews this executive summary and provides deeper and more up-to-date insights for this and coming months. Click HERE to learn more about InfraCap investing strategy and focus.
Most investors do not appreciate that the Fed has the ability to accelerate quantitative tightening through open market operations that borrow or lend money to the banking system in order to reduce or increase bank reserves. We estimate that the Fed is more than halfway through its quantitative tightening program, with another $850 billion of reduction required to bring bank reserves to pre-pandemic levels. We project that the quantitative tightening already executed will cause inflation to decrease in the fall. Most commodity prices have fallen over 20% from their highs, and we believe these declines should start to be reflected in lower CPI numbers to be released in August.
The Fed announced that it had executed on $136 billion of quantitative tightening for the week ended June 22nd. This significant reduction brings total quantitative tightening for 2022 to $925 billion, which is a 14.5% reduction in the monetary base.
It is universally agreed that there is a housing shortage in the United States. We anticipate that the housing sector will likely remain resilient, gradually slowing but avoiding a crash. The housing market has played a pivotal role in 11 out of the 11 post WWII recessions.
Stock Market Outlook:
The stock market has become almost 60% correlated with the monetary base and 10-year bonds are approximately 40% correlated. The US dollar has already appreciated by 7% this year, which is an indicator of strong international flows into US capital markets. Foreign investors bought $5 trillion of US securities in 2021. We believe foreign inflows and US capital market strength will support the stock market. We are still focusing on diversified asset allocations and will look for high yielding securities in asset intensive industries.
We do not expect a significant recession in the US in 2022/23 due to a very resilient housing sector with an ongoing shortage of housing (4 million homes), and tail winds from the enormous 50% US energy cost advantage relative to the rest of the world. We expect 2022 economic growth to slow dramatically into the 0-2% range due to erratic and very hawkish monetary policy.
We believe consumer weakness is overstated. The strong labor market combined with significant wage growth should support consumption, although we do see consumption shifting from goods to services (i.e., Travelgeddon). Renters remain under pressure due to rising rents; and as a result we believe renters may need to reduce spending or shift to lower cost stores, such as dollar stores. Learn more about our investing strategy.
Global interest rates may be depressed from a potential recession in Europe as a result of the ongoing energy crisis and slower growth in China. We continue to expect that 10-year treasury bonds will find a bottom in the 3% yield area, which should help stabilize the stock market.
There are $52 trillion of global pension assets which will rebalance and reallocate into treasuries if yields are significantly above 3%, capping the potential rise in rates. In addition, yield curves tend to flatten during Fed tightening cycles.
The Fed has reached a level of maximum hawkish rhetoric, so we believe it can no longer drive long term rates higher with Fed speak.
We see oil trading in the $100-120 range while the Ukraine war continues and in the $80-100 range if there is a resolution in 2022. We see demand for LNG and Natural Gas remain high as global consumption increases and prices remain elevated.
The most efficient way to transport hydrogen is LNG, as natural gas has 4 hydrogen atoms and only one carbon atom and has a liquefaction point of only minus 225 degrees Fahrenheit versus negative 450 degrees Fahrenheit for pure hydrogen.
China accounts for half the increase in global LNG demand and we do not expect that demand to slow due to the renewed focus on carbon reduction
Our models show that the S&P 500 is approximately fairly valued at 4,100, based on a current 10-year interest rate of 3.30%, implying 8% upside. But if the 10 year rises to a yield of 4.0%, fair value on the S&P would drop to 3,500. We see Bitcoin dropping below $20,000 during Fed the balance sheet run-off and we believe it could hit its pre-pandemic level of $10,000. Cryptocurrencies and speculative investments are likely to remain under pressure. In 2021, we used the phrase “adult swim market” to characterize the reduction in liquidity in 2022 that would impact momentum-driven stocks. We continue to see this thesis unfold and remain cautious in our allocations, reducing position concentrations when advantageous and diversifying when sectors are relatively discounted.
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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 subadviser 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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