New York - November 5, 2024 ~ 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.
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November MARKET & ECONOMIC OUTLOOK WEBINARBe sure to register or attend our Monthly Market & Economic Outlook Webinar scheduled for Thursday, November 14th at 1:30 pm ET. In the webinar, Jay Hatfield, Infrastructure Capital Advisors CEO and Portfolio Manager, will walk you through updated market commentary, economic outlook, and promising markets' high-yield performance for October and the coming months. SIGN UP! |
Top Headlines from Market & Economic Outlook Report:
We are initiating our 2025 year-end S&P 500 Index target of 6,600 based on 21.5x 2026 consensus EPS estimate of 305 with risk skewed to the upside due to AI impacts. Our target assumes that there is not a democratic sweep as the betting odds implied probability of a democratic sweep has declined to below 3%, primarily driven by prospects for Republicans in the Senate.
In the case of a democratic sweep our target goes to 6,000, assuming a rise in the corporate tax rate to 25%, which will lower 2026 EPS estimates, and a 28% capital gains tax, which will trigger heavy harvesting of capital gains in 2024.
Political betting odds are great indicators of near-term shifts in races but are not necessarily accurate absolute predictors of the outcome as close races are driven by turnout and even gamblers cannot poll turnout either. We are confident of our divided government call mostly due to the overwhelming advantage the Republicans have in the current Senate race.
Contrary to public opinion, the president usually has very little impact on stocks or the economy as the US 3 branch system of government puts severe limits on the President’s power. The exception to this rule is the case of significant changes in taxes that impact corporate profits and capital formation.
The IMF estimates that capital formation is 70% correlated to GDP growth with every 10% increase in gross investment rate contributing to a 1.5% increase in the GDP growth rate. Significant changes in taxation of capital almost always require one party control of the executive and legislative branches of government.
We estimate the US government’s irresponsible fiscal policy costs the US economy .75% of economic growth per year.
The average corporate tax rates of socialist (more than 50% of economy controlled by the government) countries in Europe is only 20%, despite very high personal tax rates, due to the fact that corporate tax rates are 60% inversely correlated with economic growth.
The US has not raised corporate tax rates since 1949.
The last significant capital gains tax increase was 1986 and it triggered a wave of capital gains realizations.
Tariff increases can increase economic growth and reduce inflation if paired with tax cuts on capital. Tariffs are the equivalent of a targeted sales tax. Capital formation is increased by taxes on consumption and less tax on savings and investment.
Our 6,600 target assumes a 10-year treasury rate of 3.5%. We believe the recent rise in the 10-year is irrational as the market’s manic-depressive estimates of future Fed rate cuts continues with excessive pessimism about future Fed rate cuts being the latest trend.
Fed policy is currently highly restrictive as the Fed has had to shrink the Money Supply by .6% over the last year (vs. a normal growth rate of approximately 5%) to maintain the elevated level of the Fed Funds rate.
Negative money supply growth will eventually result in inflation approaching zero and the economy going into recession driven by the housing sector.
The Fed will need to pursue the rate cuts implied by its own projections in order to avoid a recession as high mortgage rates will precipitate a housing driven recession. We expect the current pessimism about future rate cuts to abate as we continue to see steadily declining inflation rates driven by the normalization of the distorted shelter component of CPI/PCE.
Most strategists, including the Fed, are highly inaccurate during periods of monetary volatility as they are either closet-Keynesians or hyper-Keynesians.
We still favor banks, REITS, Small caps and preferred stocks as rate decline has not yet been reflected in those sector’s stock prices. We now expect regionals to participate in the bank rally as net interest margins are now improving.
The recent rate cut in China validates our bullish view on the global stock and bond markets as the Global Monetary Base (www.infracapfunds.com) starts to expand rapidly.
We project that the economy will grow 2-3% this year (No Landing).
We believe the “Sahm” rule is not useful for predicting recessions as it follows a lagging indicator (unemployment). We follow the “Hatfield Rule” which states that a recession is indicated by housing starts (leading indicator) dropping below 1.1MM units. The recent increase in starts to 1.35MM from 1.25MM last month validates our view that we are not heading into a recession, but if the recent rise in rates holds, with the 30-year mortgage over 7%, we are at risk of a recession.
11 out of 12 post WWII recessions were precipitated by a decline in housing investment.
The Fed’s policy framework is overly rigid and needs to be reformed.
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 (See example in Commodity Outlook).
Recent oil price weakness is due to seasonal factors not economic weakness in China or growth fears.
A Trump Presidency would potentially create upside for oil, as Trump is likely to re-impose sanctions on Iranian oil exports.
The core problem in the US is multi-generational poverty. Multi-generational poverty continues due to substandard educational opportunities in low-income areas. Low-income schools need more resources to overcome inherent disadvantages of low-income households.
We support making technology and tutoring grants to low income schools to level the playing field relative to higher income schools.
Stock Market Outlook:
S&P 500 Index target of 6,000 based on AI Boom, resulting increase in S&P EPS estimates and long term growth rate, and Increased Conviction on Global Rate Cuts:
For example, recent earnings reports and updates from NVDA, AAPL, ADBE, and AVGO validated that the AI boom is sustainable at the end user level. During technology booms, it is optimal for companies with promising technology to become overvalued to attract capital and reduce the time to market.
We are forecasting rate cuts in November and December, which will be a big catalyst for the stock market during the 4th quarter.
Fed / Central Bank Outlook
The BOC and ECB rate cuts has started the global wave of rate cuts and will put pressure on other central banks to cut as currency moves reduce the growth of countries slow to cut.
We project that there will be a $2 Trillion Injection of Liquidity into the Global Money Supply over the next year.
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.
We forecast that the Fed will cut rates 25bp two more times in 2024.
Inflation does not magically re-ignite or become “sticky’. Inflation is caused by excessive monetary stimulus and supply shocks. Current inflation is 1.5% if one utilizes market prices readily attainable from internet rental services.
Investors tend to overestimate the magnitude of Federal budget problems as they ignore the impact of Fed purchases of treasuries due to past QT and ongoing growth of the money supply and associated purchase of bonds.
Correcting for the Fed’s normal purchased of treasuries due to the expanding money supply, the Federal budget deficit is 4.5% of GDP which is sustainable given that nominal GDP growth averages 5%.
Fiscal irresponsibility does reduce potential GDP growth by approximately 1% due to crowding out of private investment.
Recent declines in oil prices are bullish for inflation prints for the rest of the year as energy prices bleed into core at approximately a 5% rate.
The Fed’s policy framework needs to be reformed.
The Fed’s 2% target has been shown to be too low by academic research and the Core PCE index is highly flawed as the Shelter component lags by 18-24 months by design (6-month lag) and due to inclusion of lease renewals vs. new leases. The Fed should also adopt a nominal wage growth target and an employment target.
Political Outlook
The math strongly favors the Republicans recapturing the Senate by taking West Virginia and Montana with the Democrats likely to retake the house due to NY redistricting and pro-choice suburban women turnout. The presidential is impossible to forecast accurately as it will be a turnout driven election.
Instead of both candidates focusing on the taxation of tips, both candidates should pledge to eliminate income taxes on those making less than $50,000.
Economic & Bond Outlook:
The hyper cyclical housing market was weakening with June new homes sales report plunging 11.3%, but after the dramatic decline in interest rates new home sales surged to a year high of 739k. In addition, homebuilders have indicated a surge in buyer’s traffic in July and August.
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 three years that the US economy would not go into a recession due to the shortage of housing in the US, but as noted above the housing sector is cooling and the US could enter a mild recession if the Fed does not cut rates this year.
We do not expect a recession as the housing sector likely to stabilize after the recent 100bp drop in the US 10-year rate.
Cutting corporate taxes is the most critical economic growth driver. Corporate taxes are 60% correlated with GDP growth.
Greece cut corporate taxes from 28% to 22% and economic growth surged.
Ireland has one of the lowest corporate tax rates in the EU and the highest economic growth rates.
The US has outperformed other OECD economies since cutting corporate tax rates to competitive levels in 2017.
Attempts to implement a global minimum corporate tax validates the importance of corporate tax rates to global competitiveness.
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.
The average post WWII recession had over a 10% decline in investment but personal consumption was on average flat.
The Chips act and other infrastructure spending from the government is very counter cyclical as it supports investment.
The chips act is an urgent national security priority as over 90% of advanced chips are produced in Japan.
If the Fed does not cut this year we likely to have a recession as both the housing sector and autos have started to show some softening.
Commodity Market Outlook:
Pollution taxes are by far the most economic method to efficiently reduce carbon and improve the environment. Taxes on mercury, SoX, NoX and coal ash would cause most global coal fired power plants to close and dramatically reduce carbon and toxic emissions.
Recent Oil Price Weakness Driven By seasonal factors and Negative OPEC Sentiment:
We maintain our $75-95 range estimate for oil in 2024 as continued production constraint from OPEC+ and steady demand growth support the price.
Middle east war providing only modest support to the oil market.
We attribute the recent weakness to seasonal/weather factors partially.
December of 2023 was the warmest in 150 years.
China’s Industrial Economy is Way More Resilient Than Perceived which Benefits Commodities:
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.
China is projected to grow by 5% this year.
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.
The property crisis is a concern, but if it starts to generate contagion, the central government is likely to intervene. The crisis impacts luxury goods companies vs. the industrial sector.
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.
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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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.
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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.
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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.
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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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