New York - March 2, 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 Monthly Market & Economic Outlook Webinar scheduled for Thursday, March 9th 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.
The Case Shiller Home Price Index was released on February 28, 2023 at negative .51% and is down 4.5% over the last 6 months. Housing inflation peaked in February of 2022 at a 27% annual rate of increase. The Case Shiller home price index leads the shelter component of CPI by approximately 12 months with a 70% correlation. We utilize Case Shiller for our real time CPI estimate, CPI-R. CPI-R was flat for January vs . CPI-U, indicating inflation of .4%. The shelter component of CPI is 33% of headline inflation and 42% of core. Consequently, the release of the Case Shiller Index is a far more important indicator of current and future inflation than CPI or PCE. Both indices are going to be overstated and volatile over the next 3-6 months, potentially limiting stock price increase and causing the Fed to overshoot on rate increases. The Fed continues to focus on lagging indicators such as CPI and the labor market, which causes it to be approximately 12 months behind in its policy response. If the Fed followed the Case Shiller Index as a key indicator of current and future inflation, it would have tightened policy in late 2020 when the index started to increase at a rate of over 15%, annualized.
Housing is the key driver of inflation as it is the primary industry impacted by monetary policy. Consequently, it is inexcusable for the Fed to ignore dramatic changes in the index as it did in late 2020 when prices were skyrocketing and now as it fails to recognize the importance of this leading indicator. In addition, the Fed fails to consider the impact of housing prices and rents on real wages. If there is a big increase or decrease in shelter prices, real wages are driven lower or higher, respectively, impacting nominal wage demands with a lag. The Fed has ignored this dynamic, leading to significant policy errors.
Our CPI-R Core index was flat for January vs. the reported .4% increase in CPI-U core. Both CPI and PCE inflation indices overstate actual run rate inflation.The shelter component of both indices lag by at least 12 months.Housing price inflation peaked in February of 2022 at an annualized rate of increase of 27%.Consequently, the reported February indices are telling us that inflation was high 12 months ago. CLICK HERE to go to the most recent adjusted real time CPI index report from Infrastructure Capital Advisors.
Stock Market Outlook:
We expect the market to be range bound through March in the 3,800-4,200 range as we are through earnings season, which was a positive catalyst and as we continue to have Fed and macro concerns overhanging the market.
There will be ongoing headwinds from mis-guided Fed policy and sluggish growth, which is likely to make the market volatile and may remain range bound in the 3,800-4,200 range for the first 6 months of the year. The Fed is likely to pause rate increases after the June meeting, which is likely to be a huge catalyst for both the stock and bond markets.
Our models show that the S&P is approximately fairly valued at 3,600, based on the current 10-year interest rate of 4.00%, implying no upside. But if the 10-year returns to a 3% yield, our target rises to 4,300. Our near-term target assumes earnings of $225 for the S&P 500 index in 2023.
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 during 2023.
We believe the Fed has reached a level of maximum hawkish rhetoric so can no longer drive long term rates higher with Fed speak (“Open Mouth Operations”).
Global growth and demand for credit is likely to be sluggish in Europe due to the energy crisis, in China due to regulatory crackdowns 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 German 10yr. and Japanese bonds are near zero.
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 China’s Zero Covid policy will result in a recovery of oil demand. We believe WTI will rise above $90 as we finish the winter heating season.
It is not possible for the US to stop using hydrocarbons as wind and solar only represent less than 6% of US energy production and are extremely difficult to expand rapidly as siting/NIMBY issues are huge barriers to expansion. We believe that the fastest way to reduce carbon emissions is drill for more natural gas which will displace coal.
High European natural gas prices are driving fuel oil/distillate prices 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.
Preferred stocks should be attractive with lower volatility and high yields in 2023. The higher yielding segment of the market generally has lower interest rate sensitivity and many issuers of preferred benefit from inflation such as certain REIT sectors.
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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.
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