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April 2024 Market & Economic Outlook and Commentary


April 2024 Market & Economic Outlook and Commentary

InfraCap Management, New York ~ 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 Wednesday, April 10th 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.


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Monthly Bond Market Outlook and Commentary

Summary of Recent Research & Critical Insights:


  1. Raising price target on S&P 500 to $5,750 from $5,500 based on AI boom and increased conviction of summer cuts

    1. As an example, NVDA’s earnings report validated that the AI boom is sustainable and we have raised our price target to $1,000 based on 40x our 2024 (1/25 YE) estimate of $25/share.

      1. During technology booms, it is optimal for companies with promising technology to become overvalued to attract capital and reduce the time to market.

      2. The AI boom has recently been validated by non-tech CEO’s such as Jamie Dimon and Steve Cohen who indicated widespread adoption throughout their firms.

  2. At its March meeting President Lagard all but announced that it will be cutting rates in June

    1. We project that there will be a $2 Trillion Injection of Liquidity into the Global Money Supply during 2024.

      1. Most investors do not appreciate that central banks cannot mandate rate cuts and must inject liquidity into the banking system, which normally causes powerful rallies in both stocks and bonds.  When the global monetary base (see www.infracapfunds.com) is expanding it is almost always bullish for stock and bond markets

      2. The European economy continues to be stalled with certain countries such as the UK and Germany experiencing a recession

        1. EC Feb Retail sales came in negative .5% and negative .7% Y/Y

        2. Feb CPI was negative 8% Y/Y

        3. Headline inflation was 2.4% Y/Y and Core was 2.9%

      3. We forecast that Euro Zone headline inflation will be approaching the ECB’s 2% target by May and that Core PCE will decline to 2.5% by the end of June.

        1. These declines should set the stage for summer rate cuts with the ECB acting first due to weak economic growth.

  3. We forecast that the Fed will not cut rates until July.  We estimate only a 20% probability of a cut in June vs. over 60% priced into the Fed Funds futures market.  A June cut probably will only occur if the labor market weakens significantly over the next 2 months

    1. Core Inflation likely to print in the .3% range for CPI and PCE and over the next couple of months as strong oil prices bleed through to core and shelter continues to mismeasure rent inflation.  Core PCE Y/Y inflation will only slowly roll down from the current 2.8% level.

    2. A July cut will be aided by a likely surge in the dollar if the ECB cuts in June but the Fed does not.  A strong dollar is very deflationary as commodities are priced in dollars

    3. We are short Fed Funds futures through July (Fed meeting is July 31st so does not affect the July contract)

  4. The US Economy Will Continue to Be Resilient in 2024:

    1. 11 out of the last 12 recessions were precipitated by a collapse in the hyper-cyclical housing sector.  We have been forecasting for the last two years that the US economy would not go into a recession due to the shortage of housing in the US.  We are projecting solid growth in GDP of 2.5% in 2024 with some headwinds from tight Fed policy causing the economy to grow below the trend growth rate of 3%.

    2. A decline in personal consumption has never caused a US recession.  Consumer spending is 95% driven by employment and wages.  Consumer spending only declines when the decline in investment spending on housing and other durables leads to mass layoffs, which causes consumers to reduce spending.

      1. The average post-WWII recession had over a 10% decline in investment but personal consumption was on average flat

 
Monthly Bond Market Outlook and Commentary

Stock Market Outlook:


Raising price target on S&P 500 Index to $5,750 from $5,500 based on AI boom and increased conviction of summer rate cuts

  1. For example, NVDA’s earnings report validated that the AI boom is sustainable and we have raised our price target to $1,000 based on 40x our 2024 (1/25 YE) estimate of $25/share

    1. During technology booms, it is optimal for companies with promising technology to become overvalued to attract capital and reduce the time to market.

    2. The AI boom has recently been validated by non-tech CEOs, such as Jamie Dimon of JP Morgan, who indicated widespread adoption of AI throughout the bank.

  2. Many forecasters are too bearish about the consensus implied earnings growth rate of 10% as they fail to recognize that all aggregate earnings growth comes from the reinvestment of retained earnings and depreciation and is not driven by margin expansion or dependent on high GDP growth.  The normal S&P earnings growth rate is over 10% as 70% of earnings are retained and reinvested at approximately at 15% after-tax rate.

    1. Corporate savings represents almost 75% of gross domestic savings in the US.

    2. Raising corporate taxes is a disaster for the economy and the stock market with an increase in the rate to 30% likely to cause a drop in stock price levels of 25%.  The drop would be due to lower corporate earnings, but also a decline in the earnings multiple due to lower growth prospects.  Economic growth would drop as corporate investment is the primary driver of economic growth.

    3. Since 1980, the average worldwide corporate tax rate declined from 40.2% to 23.2%.  An increase in the rate would make the US uncompetitive and cause a loss of jobs and tax revenue as global corporations move operations overseas.

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Monthly Economic Outlook Commentary

Bond Market Outlook:

We project that 2024 will be the Year of Global Rate Cuts. The futures market in all major economies imply an unprecedented number and magnitude of rate cuts. The global rate cuts are likely to drive the 10-year Treasury rate into the 3-3.5% range.

  1. ECB implied rate cuts are currently 5 (116BP)

  2. CPI data in the Euro Zone is likely to cool dramatically over the next 4 months due to base effects.

  3. Every OECD country except Japan is projected to cut rates with the average cut well over 1%.

  4. The US has 4 rate cuts priced in which was partially validated by the Fed dot plot implying 3 rate cuts. The Fed pivot marks the first time since the Pandemic started that the Fed has responded appropriately to real-time data.

  5. The Fed is likely to be slower to cut than most central banks as the US economy is stronger than most and the Fed still believes in the Urban Myth that 70s inflation was caused by starts and stops in monetary tightening while ignoring the 1200% rise in energy prices as the key culprit.

  6. Smaller central banks such as Hungary and Chile are already cutting rates.


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Monthly Stock Market Outlook Commentary

Fed and ECB Outlook:

We expect the US economy to slow but avoid a recession and execute a soft landing with economic growth decelerating to the 2% range as credit tightens and long-term rates rise due to Fed policy, offset by post-pandemic tailwinds. The housing sector, which usually is the leading cause of recessions, continues to be resilient with an ongoing shortage of total homes for sale. The recent increase in mortgage rates increases the probability of a recession, but we expect rates to peak and start to decline as the European economy continues to contract.

  1. There are currently 7.9 million construction workers employed which is an all-time high and has been steadily rising during the Fed tightening. We expect this to continue as the housing shortage and spending on infrastructure supporting the sector. Construction spending totals $1.8 trillion representing over 8% of GDP and is the most volatile of all sectors.

  2. During the housing crisis of 2008, 2.7MM construction workers were laid off, representing a 30% decline, and 2.0MM related manufacturing and transportation workers were also laid off, representing 2/3rds of the job losses during the great recession. Every post WWII recession has had large construction layoffs that on average caused a 14% loss of construction workers.

  3. We project that the impact of the infrastructure bill, IRA, Chips Act and ARPA will add approximately $200 billion per year to construction spending, which should offset the slowing in construction of office buildings and other commercial real estate.

  4. Many investors and strategists don’t seem to appreciate that the economy does not spontaneously combust. All 11 post WWII recessions were caused by high inflation, which caused the Federal Reserve to raise rates, resulting in a contraction in business investment. A decline in consumer consumption has never precipitated a recession. Consequently, focus on minor influences on consumer spending, such as student loan payments or Pandemic savings, are not relevant to predicting a recession.

    1. The average post WWII recession has been precipitated by a sharp drop in investment averaging over 13%. This drop causes large layoffs in the construction and manufacturing sectors which constrains consumer spending.

      1. Consumption is 66% of GDP and investment is 21%, BUT investment is highly variable and consumption very stable, which results in investment being the driver of recessions.

      2. Personal consumption growth during recessions has been slightly positive.

        1. The US consumer is relatively strong due to strong labor markets and strong housing markets, with homeowners benefiting from higher real estate prices and low fixed mortgages.

        2. Lower-income households who do not own a home are under pressure from stagnant wages and high inflation in rents and energy over the last two years.

      3. Most consumers are not economists, so they are more concerned about inflation over the last 2 years vs. just 1 year as many lower-income consumers’ wages have not kept up over the last 2 years.

    2. The average post-WWII recession resulted in a 2.3% decline in real GDP.

    3. The only type of government spending that is counter-cyclical when the economy is at or near full employment is investment spending.

  5. Many investors and strategists don’t seem to appreciate that the economy does not spontaneously combust. All 11 post-WWII recessions were caused by high inflation, which caused the Federal Reserve to raise rates, resulting in a contraction in business investment. A decline in consumer consumption has never precipitated a recession. Consequently, focus on minor influences on consumer spending, such as student loan payments or Pandemic savings, are not relevant to predicting a recession.

    1. 11 out of the last 12 recessions were precipitated by a collapse in the housing sector. We have been forecasting for the last two years that the US economy would not go into a recession due to the shortage of housing in the US. We are projecting solid growth in GDP of 2% in 2024 with some headwinds from tight Fed policy causing the economy to grow below the trend growth rate of 3%.


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Monthly Bond Market Outlook and Commentary

Commodity Outlook:


  1. Recent Oil Price Weakness Driven By Warm Winter:

    1. We maintain our $75-95 range estimate for oil in 2024 as continued production constraint from OPEC+ and steady demand growth support the price.

    2. Middle east war providing only modest support to the oil market.

    3. We attribute the recent weakness to seasonal/weather factors partially offset by uncertainty created by Houthis attack on Red Sea shipping lanes.

      1. December of 2023 was the warmest in 150 years.

  2. China’s Economy is Way More Resilient Than Perceived which Benefits Commodities:

    1. China is the only major global economy that is loosening monetary policy.  China increased its monetary base over $140 billion in September representing a 2.9% increase vs. a $300 billion drop in the Global Monetary Base.

      1. China is projected to grow by 5% this year.

      2. China saves 45% of GDP vs. less than 20% in the US, which results in much higher long-term growth as the critical driver of economic growth is savings and investment.

        1. The property crisis is a concern, but if it starts to generate contagion, the central government is likely to intervene.

        2. The China recovery story is bullish for global commodities and growth.

  3. The utopian vision of an all-electric economy has now completely imploded as average consumers have limited interest in all electric autos, and renewables development falters due to nimby opposition to offshore wind and massive cost over runs.  Europe’s failed energy transition is likely to exacerbate a recession and lead to regime change in many countries.

    1. The failed attempt to push an all-electric vision has hurt the environment as there was less focus on hybrid electric cars and using natural gas to supplant coal.


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Monthly Bond Market Outlook and Commentary

Quick Tip:

The key driver of economic growth and earnings growth is fueled by after-tax corporate earnings. High corporate tax rates encourage corporations to relocate operations to lower-tax countries and reduce after-tax corporate earnings.

 

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