May 2025 Commentary and Economic Outlook
- InfraCap Management
- 8 minutes ago
- 5 min read
MAY 2025 EDITION:
Commentary and Economic Outlook
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MARKET & ECONOMIC OUTLOOK WEBINARBe sure to register or attend our Monthly Market & Economic Outlook Webinar scheduled for Wednesday, May 14th 2025 @ 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! |
 | Stock Market: |
We expect the market to gyrate in the 5,000-6,000 range with a 5,500 inflection for the S&P 500 Index during the second quarter until there is greater policy clarity on tariffs, we get the details of the tax bill, and we get visibility on Fed rate cuts. The stock market is likely to stall out or pull back after the bulk of EPS season is behind us. We expect a summer power-rally, and our year-end S&P 500 Index target is 6,600 now as we now assume that there will be no material reduction in the corporate tax rate.
We expect earnings season will help stabilize the market as companies provide details on how they will cope with tariff increases.
The Trump administration’s tariff policy is deeply unpopular on a bipartisan basis as is true with most tax increases. Only 39% of voters approve of the Administrations tariff policy vs. 49% approving of immigration policy. According to betting sites, the probability of Democrats regaining the House recently rose to 84% from 70% at the beginning of the President’s term and the probability of the Senate going to the Democrats rose from 20% to 30%. Its unclear that tariff revenue can be utilized to fund tax cuts in the reconciliation process.
The US is the biggest currency manipulator in the world as its enormous budget deficits cause US rates to be among the highest in the world, which drives the dollar significantly higher and results in large trade deficits. Most investors do not realize that trade flows must balance financial flow, so any country that needs to borrow from overseas will necessarily have a large trade deficit.
Inflation is always caused by excessive money supply growth as occurred during the Pandemic (22% inflation with 22% excess money supply growth) and never by tariffs and deportation. The money supply (M0) shrank 5% Y/Y indicating that prices will continue to decline.
| Bond Market: |
The Fed kept the assertion that economic growth is continuing at a solid pace despite clear signs of weakness in the critical construction sector. In addition, it indicated that the risk of inflation has risen. The hawkish statement had little impact on the market as the statement was consistent with Fed commentary prior to the meeting.
We continue to believe that the Fed will cut 3 times this year and that the 10-year yield will end the year in the 3.5%-4.0% range after the Fed cuts rates. The US economic growth is decelerating rapidly with growth likely to drop from over 3% into the 1-2% range as the effects of the Fed’s ultra-tight monetary policy impacts the residential and commercial construction industries and the deflationary/recessionary impacts of Trump Administration tariffs and DOGE layoffs impact the economy.
The President definitely has the authority to remove the Fed Chair for cause according to Title 12 Section 242 of the US Code. The term “for cause” is used in legal settings to indicate that a decision or action is based on a valid, justifiable reason, rather than being arbitrary or without basis. Humphrey’s Executor case also concluded that an independent agency commissioner cannot be fired arbitrarily but can be fired for cause based on his inefficiency, neglect of duty or malfeasance. In the Humphey’s Executor case the remedy for an arbitrary firing was payment of back pay, not reinstatement. The President, therefore, has the right to remove the Fed Chair. The current Fed Chair could sue for reinstatement or damages but would no longer be Fed Chair.
The current Fed policy framework is very dangerous and needs to be reformed. Specifically, it slavishly follows an index that trails real time market inflation by two years, resulting in the Fed being constantly behind the curve. In addition, the Fed’s arbitrary 2% target has been proven to be too low as it precipitated the Great Financial Crisis.
The Fed should adopt a more flexible target range of 2-3% and modernize CPI/PCE to ensure real time pricing of inflation. It should also adopt an unemployment target range to balance out its stated dual mandate. It should adopt a more free market approach of targeting steady growth of the money supply in line with nominal GDP growth and letting the Fed Funds rate float within a larger band based on market conditions. Finally, the Fed needs to modify its inflation forecasting models to incorporate the money supply as the critical independent variable. The new Fed Chair should be nominated that is committed to modifying the current dangerous policy framework.
We continue to be bullish on bonds with a 3.75% year-end yield target on the 10-year. The economy is slowing (see details below) and weakness in the US job market will likely force the Fed to cut 3 times this year. The market had failed to recognize that tariffs are recessionary/deflationary as the tax revenue reduces the deficit.
Changes in 10-year treasury inflation break evens (ILBE on terminal) dropped by over .2% to 2.2% since the “Chart of Death” was unveiled by President Trump at the liberation day press conference.
We do not expect a US recession as the economy is supported by the fact that the bond market has cut long-term rates for the Fed. Oil prices have dropped over 20% this year and tech spending is likely to remain strong. The current tariff increase will generate less than $170 billion in tax revenue which is only .5% of GDP and less than the benefit of lower energy prices for the US consumer. In addition, tech spending is offsetting the weakness in construction and residential. We forecast lower US growth in the 1-2% range.
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.
| Commodities |
We reiterate our StagDeflation call as we estimate that headline inflation will not be significantly impacted over the next two months by tariffs as the decline in energy prices (1.2%= 20%*6%) will more than offset the increase in tariffs (.5% =10%*5%).
Energy is 6% of headline inflation (and 5% of PPI) so a 20% reduction in energy prices will trim CPI by almost 1% and will reduce core by up to 1% as lower energy prices bleed through to core slowly over time.
We are lowering our 2025 target on oil from $80 to $70 (range of $60-80) as it has become clear that Trump will use his influence with the Saudis and Russia to limit price increases despite tighter sanction on Iran. This policy will offset a good portion of one-time price increases from tariffs. We do not expect an increase in US production.
Pollution taxes are by far the most economic method to rapidly reduce carbon and improve the environment. Limiting natural gas production is highly destructive to the global environment and has led to regime change in Europe.
President Trump has indicated that he will pressure OPEC, particularly Saudi Arabia, to increase oil production and keep prices low. At the same time, Trump supports domestic drilling which is positive for U.S. production volumes. Therefore, companies with volume exposure have outperformed those with commodity price sensitivity. We have lowered our oil price target to $60 – 70 per barrel.
Artificial Intelligence and data centers have opened up new growth prospects for natural gas midstream companies to supply gas fired power plants. Natural gas plants have some of the shortest times to build and we believe they are best positioned to supply reliable power quickly.