The team at Infrastructure Capital Advisors provides key insights and advice on current market conditions and economic outlook for June 2022 and the coming months. Review below but be sure to register to join our June 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.
We do not expect quantitative tightening to significantly impact the US stock market in 2022. Over the last year the Fed has been neutralizing the effect of its quantitative easing by lending out the securities it purchases from the market. Over the next year, the Fed could partially neutralize the impact of quantitative tightening by reducing the current $2.1 trillion of overnight lending, which will reduce the impact on the stock and bond markets.
We estimate that the US stock market will be able to absorb the impact of quantitative tightening as US corporations bought back almost $900 billion of stock in 2021. The residual $200 billion of annualized quantitative tightening can be absorbed by dramatic reductions in new issue activity, continued LBO activity (as evidenced by recent buyouts of REITs and the potential Twitter transaction), and international flows of capital into the US treasury and stock markets.
The monetary base shrank by $800 billion during 2022 and the Fed’s short-term lending of treasuries and mortgages increased by $1.75 trillion over the last year.
Stock Market Outlook:
We continue to believe that 2022 will be a difficult year for stocks with the S&P 500 index likely to be down 5-10% for the year, with some upside from today’s 4,100 level, depending on the paths of long-term interest rates and Fed policy tightening. We are focusing on asset sector allocations that will benefit during periods of rising interest rates and inflation.
Our models show that the S&P 500 index is fairly valued at 4,400, based on the current 10-year interest rate of approximately 2.90%. But if the 10 year rises to a yield of 4.0%, fair value on the S&P would drop by over 12% to 3,500.
We believe overvalued momentum investments such as meme stocks, SPACs, money-losing tech stocks and cryptocurrencies will continue to remain under pressure in 2022. In addition, we see the trend of investors rotating out of these higher risk investments and into safer allocations continuing, and that dynamic exacerbates sell-offs of these riskier investments. Learn more about our investing strategy.
We expect that 10-year treasury bonds will find a bottom in the 3% yield area, which should help stabilize the stock market.
Historically, the yield curve tends to flatten during Fed tightening cycles. We believe the Fed has reached a level of maximum hawkish rhetoric so they can no longer drive long term rates higher with suasion.
We see global growth and demand for credit likely to be sluggish in Europe due to its ongoing energy crisis, and in China from its regulatory crackdown. Although growth in the US will be impacted by hawkish Fed policy and a large reduction in the budget deficit (i.e., Federal Government spending will be down approximately $2 trillion in 2022, relative to 2021) the US 10-year treasury bond is still higher yielding than the German Bund 10-year yields, making it attractive to foreign allocations.
Recovery in international travel (Travelgeddon 2022) will likely support demand (we project 3MM barrels of incremental demand) in 2022 as global herd resistance (not immunity) increases through vaccination and infection. In addition, we continue to see constrained growth in oil production through market forces and government policy, which we view as de facto OPEC ++ (US joining OPEC).
We expect oil to trade in the $100-120 range as the war in Ukraine continues without resolution.
It is not possible for the US to stop using hydrocarbons as wind and solar only represent 4% of US energy production and are extremely difficult to expand rapidly as siting/NIMBY issues are huge barriers to expansion. We see this dynamic supporting energy prices.
The Fed will start letting its $9 trillion of treasuries and mortgage securities run off, ramping up to $95 billion per month by September. This continued tightening is likely to put pressure on speculative investments that are still in a bubble, such as cryptocurrencies. We continue to focus on diversification and asset allocations to defensive dividend stocks such as utilities, telecom services, pipelines, consumer staples and preferred stocks with significant dividends.
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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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