New York - July 7, 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 join our Monthly Market & Economic Outlook Webinar scheduled for Thursday, July 13th at 1:30 pm ET where Jay Hatfield, CEO/CIO and portfolio manager will provide even more recent updates and insights to this report and the changing market and economy. Not registered for the webinar already? Click here to register. Also, by registering, we will send you a webinar playback video link if you are unable to join live.
While we expect that the Fed is likely to raise rates just one more time in July, it is possible that the Fed may continue the current pause, as we anticipate that the data to be released in advance of the Fed meeting will reflect the largest roll down in inflation in history.
Expected Fed theory changes - Even this fundamentally flawed Fed will be forced to consider abandoning its “persistent/entrenched” theory of inflation and to acknowledge that inflation is declining rapidly, just as lagging data in late 2022 forced the Fed to abandon its disastrous “transitory” theory of inflation.
There are now two prominent dissenters from the Fed’s flawed Phillips Curve Framework, including Austan Goolsbee of the Chicago Fed and Raphael Bostic of the Atlanta Fed.
The money supply declined 20% during 2022 from the highs, which caused mortgage rates to rise at a historic pace from 2.8% to over 7.0%, resulting in a housing price decline of over 5% since June of last year.
The NY Fed’s Multivariate Core Trend PCE indicator, a multifactor model meant to capture the trend inflation rate, plummeted from 4.5% in March to 3.4% in April.
The leading indicators of inflation are energy prices, money supply growth and housing prices. Unlike inflation today, during the 1970s, energy prices increased an unimaginable 1200% ($3 to $39), which caused 90% of the inflation during the decade and housing prices rose an average of 10% per year. Real wages declined by 6% detracting from inflation, which supports the assertion that the labor market was not a material contributor to inflation.
Stock Market Outlook:
We remain bullish on the stock market in the second half of the year and are raising our 4,500 target on the S&P to a range of $4,500 to $5,000 based on a 19x 2024 EPS estimate of 240 and 21x on the upper range. As the AI boom unfolds and many AI stocks move from being undervalued to becoming fully or over-valued, the market may trade to the high end of our range.
The Dow is currently only trading at 16.5x 2024 earnings, so we are focusing on adding large capitalization defensive dividend stocks and preferred stocks that have lower volatility and attractive yields.
The economy continues to be resilient and earnings estimates have only declined slightly. Earnings estimates for 2023 and 2024 have only declined 3% and 2%, respectively this year.
In 2024, REITs that benefit from declining interest rates and a Pandemic recovery such as hotels, office, retail or entertainment may be attractive investment opportunities.
Bond Market Outlook:
We expect that 10-year treasury bonds will find a bottom in the 4% yield area and potentially rally into the 3-3.25% range in the second half of 2023.
Fears about treasury issuance post-debt ceiling agreement could be unfounded as the Fed is likely to reduce reverse repo to offset the increase in Treasury cash.
There are $47.9 trillion of global pension assets, with only 32% allocated to bonds that will rebalance and reallocate into treasuries if yields are significantly above 4%, capping the potential rise in rates.
Global growth and demand for credit 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.
Commodity Market Outlook:
We expect oil to trade in the $75-95 range while the Ukrainian War continues, with European natural gas prices at the energy equivalent of oil being at over $90/barrel. A key global energy and climate opportunity is to rapidly develop US natural gas transmission and export capacity of the US.
The European energy crisis is likely to offset weak global demand for oil. OPEC+ continues to support oil prices through production cuts.
The European energy crisis is likely to offset weak global demand for oil.
The end of the China zero Covid crisis will result in a recovery of oil demand.
OPEC+ continues to support oil prices through production cuts.
Oil prices are down 35% relative to last year and natural gas prices are down more than 70% from a year ago. Jet fuel is down 65%, diesel fuel is down 40%, and retail gasoline prices are down 25% from a year ago.
Our ETFs update positions daily, so investors can easily track what defensive dividend stocks, including preferred stocks, we favor. Many strategists/investors are more bearish than we are and project the S&P goes to 3,000. They believe inflation will be persistent, the Fed will be forced to move rates higher and higher, and the US will have a deep recession. Covered call writing strategies likely perform well during periods of volatility and if markets stall.
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