March 2026 Commentary and Economic Outlook
- InfraCap Management
- 12 minutes ago
- 8 min read
MARCH 2026 EDITION:
Commentary and Economic Outlook
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MARKET & ECONOMIC OUTLOOK WEBINARBe sure to register and attend our Monthly Market & Economic Outlook Webinar scheduled for Thursday, March 12th 2026 @ 1:30PM EDT. In the webinar, Jay Hatfield, Infrastructure Capital Advisors CEO and Portfolio Manager, will walk you through updated market commentary, and economic outlook for the coming months. SIGN UP! |
 | Economy: |
We expect Iranian offensive capabilities, including problematic drone and mine attacks, to be contained within a month, with oil prices likely to drop below $70/barrel after the Strait of Hormuz reopens.
The key to opening the Straight is eliminating Iranian missile and drone launching capability and the US providing escorts through the straight.
If the Strait of Hormuz is closed indefinitely oil could trade as high as $150.
Until the war situation is resolved we expect oil price volatility to continue to be high with strong resistance at the $100 area and support at the $80 level.
Our bullish stance on bonds and stocks is dependent on declining PCE this year. Consequently, reopening the Straight Is critical.
We believe that private equity firms have been unfairly penalized by fears of losses raised by auto related defaults, but our work indicates that these issues are not material for the large private equity/credit firms.
We estimate that private credit has a full cycle default rate of 5-6% with a potential peak of 10% this cycle as compared to high yield bonds at 3.0% and preferred stocks at only .6%.
At a peak default rate of 10%, private credit funds will be able to withstand the increase in defaults and that level is already more than reflected in publicly traded companies such as alternative asset managers and BDCs.
Assuming oil prices drop below $70/barrel, we remain optimistic that PCE core approaches the Feds arbitrary 2% target by year end as the shelter component continues to gradually reflect market prices and tariff impacts roll off later in the year. The money supply (monetary base) is down almost 6% year over year. The expected decline in inflation supports our view that the 10-year declines to 3.75% and the S&P hits 8,000 by the end of the year.
Both Trueflation and Realflation support our bullish view:
Truflation as of 2/12/26: 0.75% YoY:
Realflation Also Below 2%:
We are forecasting robust US GDP growth of 3.3% in 2026 primary driven by continued strong personal consumption of 3% and a resumption in investment growth of 4% as housing and construction recover in response to the dramatic decline in 30-year mortgage rates by almost 100bp.
Average post WWII GDP growth is 3.15% so our forecast is not out of line with historical averages.
Contrary to public commentary, US global bond spreads have tightened dramatically over the last year with the average spread of US treasuries relative to our top 17 trading partners shrinking by an average of 51 basis points.
We view the surge in gold and other metals as a loss in crypto exceptionalism vs. a loss of confidence in the US or other major countries. Crypto is clearly not digital gold and has ceded the momentum trade to the metals complex.
The main implication of this tightening is not related to US exceptionalism but rather an indication that the rest of the world is way ahead of our incompetent Federal Reserve with global central banks having reduced their policy rates to the neutral rate over a year ago, resulting in stronger economic growth and increasing the probability that the next policy move might be an increase. Japan is the most extreme example of this hawkish move among non-US central banks, where long term spreads of US treasuries over Japanese bond yields have tightened by 136 basis points. There has also been a policy shift in many nations to increase government spending on defense and other areas, particularly in Germany where spreads of US treasuries over Bunds have tightened by 69 basis points over the last year.
The economic implication of this tightening is that the primary driver of long-term bond rates is not global bond rates or small changes in expected fiscal deficits but rather expectations of future central bank policy.
We are negative on the selection of Kevin Warsh as the Fed Chair nominee as he was a member of the Fed that raised rates 17 meetings in a row during the Mid-2000s even though Core PCE inflation was approximately 2% and remained hawkish even after the GFC was well under way. Warsh would likely be a worse Fed Chair than Powell due to his continued strong commitment to the disastrous 2% inflation target. He is a classic Rhino who does not care about the middle class and is hyper focused on the flawed 2% target.
We do still expect the Fed to cut rates 3 times as PCE core is very likely to roll down to approximately 2% by year end. Given Warsh’s history of hawkishness it will be easy for him to convince the FOMC to implement cuts. Consequently, we are reiterating our 8,000 S&P target and 3.75% year end target on the 10-year bond.
The Fed Funds target rate and the Fed’s net balance sheet are not independent variables, the target Fed Funds rate drives the size of the Fed’s net balance sheet. The Fed did badly mismanage its total balance sheet during the Pandemic as it was buying so many long term treasuries it was forced to borrow $3 trillion of reverse repo from the banks in order to keep Fed funds above zero, resulting in a massive loss on long term securities as long rates rose. These losses resulted in the Fed having negative $200 billion of negative equity, which makes the Fed technically insolvent. If the Fed cuts rates three times this year, the last of the reverse repo built up during the Pandemic should be reversed and the balance sheet should be normalized with liabilities matched with long term assets. If the Fed wanted to further shrink the balance sheet it would have to stop paying interest on reserves.
We are in a recession in the interest sensitive Residential and Construction industries due to overly hawkish Fed policy. The recession continued in the Q3 GDP numbers with both sectors still declining a total of .4% for the quarter and overall investment near zero. The reported number was above trend at 4.3% driven by strong personal consumption expenditures of 3.5%, which is not likely to be sustainable. GDI, an alternative measure of economic growth was a more modest 2.4% for the quarter.
The monetary base is the critical leading indicator of inflation and GDP growth. M1 and M2 have become outdated indicators after the GFC as banks now have massive excess reserves so the Fed can no longer control the size of bank balance sheets to restrict credit. In addition, non-bank lending has grown exponentially, further limiting the importance of M1 and M2 relatively to the monetary base.
The monetary base has shrunk by over 6% Y/Y (vs. a normal growth rate of 5%) and oil prices are down over 15%, both of which are very deflationary and could lead to a recession.
The “Hatfield Rule” is a recession indicator which states that if housing starts drop below 1.1MM there will be a recession. It is superior to the “Sahm” rule as housing is a leading indicator and employment is a lagging indicator.
Consequently, there is a significant shortage of homes in the US of approximately 4MM homes. Also, there is now an active group of investors buying new homes to rent which provides for more resilient demand than has existed in the past. A decline in the housing sector accounted for 12 out of 13 post WWII recessions.
In addition, employment growth has stalled with less than 22k jobs created on average over the last 4 months according to the employer survey showing no growth over the last 7 months and over 850k jobs lost according to the household survey. Continuing claims also remain elevated at almost 2MM.
Private investment GDP drives economic cycles.
Tariffs are positive for economic growth in the medium to long term as the additional revenue from tariffs reduces the federal budget deficit and crowding out of private investment. Savings and investment are 70% correlated with GDP growth globally according to an IMF study.
We forecast that the Federal Budget deficit declines to $1.45 Trillion in Fiscal 26 with tariffs contributing $400 billion of incremental revenue based on an expected average tariff rate of 17.5%.
| Stock Market: |
Our 2026 S&P target is 8,000 for 2026, assuming a 23x multiple of 2027 Estimated S&P earnings of 348. That high multiple is justified due to the ongoing AI boom, increased visibility on Fed rate cuts and historically low corporate tax rates. The 2017 decline in the corporate tax rate from 35% to 21% increased the theoretical multiple on the S&P by 4 multiple points.
Targets are not just designed to signal buys but also sales. Our 7,000 target worked well in 2025 as the market pulled back when it hit 6,940 as the Mag 8 are fully valued with our models currently showing only 1.8% average upside.
Our bullish stance on bonds and stocks is dependent on declining PCE this year. Consequently, reopening the Straight Is critical. If the current $90 price, there would be an approximately 2.5% increase in core PCE which would keep the Fed on full hold.
We do not think that AI stocks are in a bubble as the MAG 8 are fairly valued but not substantially overvalued. In addition, we believe that any major company that does not invest substantially in AI will be left behind. We do think there will be an AI bubble over the next 3 years which creates a huge opportunity for investors in today’s market.
Regional banks should benefit from more Fed rate cuts which will cause an expansion in NIM. We recommend rotation out of Investment Banks which are fully valued.
Given the decline in rates and our bullish outlook on stocks, we recommend large cap dividend stocks, small cap stocks and high yield fixed income.
| Bond Market: |
We continue to be bullish on Treasury bonds with a 3.75% year-end 2026 yield target on the 10-year, which is 100bp over our forecast of the neutral/terminal rate of Fed Funds.
The economy is slowing and weakness in the US job market will likely cause the Fed to cut rates 4 times over the next year. GDP growth only averaged 1.5% last year and the interest sensitive construction and residential sectors have contracted over the last year in response to tight Fed policy.
Importantly, 2 members of the 7-member Federal Reserve Board came out for a July rate cut. The market had failed to recognize that tariffs are recessionary/deflationary as the tax revenue reduces the deficit.
US 10-year bonds are 80% correlated to the expected terminal Fed Funds rate and 25% correlated to global bonds. The budget deficit is relatively static and has been in the 5% of GDP range for years, so not a driver of interest rates in the short to medium term.
Market implied policy rate continues to forecast 10-year yields with a 1% average spread.
We recommend investors add high yield bonds and preferred stocks as we do not expect a big increase in defaults and we expect treasury rates to decline below 4% as the economy weakens.
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