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October 2023 Market & Economic Outlook Report

Writer's picture: InfraCap ManagementInfraCap Management

October 2023 Market & Economic Outlook Report

New York - October 9, 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 JOIN our Monthly Market & Economic Outlook Webinar scheduled for Thursday, October 12th 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.


Due to key influencers in the market and economy changing, the October Market & Economic Outlook report continues with some changes new from September with a specific focus on the Fed and ECB Outlook and the Inflation Outlook. Click any key area below to skip straight down to that section in the report.


Jay Hatfield - InfraCap CEO and Fund Manager

Monthly Economic Outlook Commentary

Bond Market Outlook:

The most recent Eurozone now-cast indicates that GDP for the 3rd quarter is declining at .9% quarter over quarter or at a 3.6% annual rate of decline. If this trend continues there will be a very deep recession in Europe. This position is based on historical data showing the average Eurozone recession results in a GDP decline of only 2.2%, and during the Great Recession, the Eurozone GDP only declined by 4.3%.

  • The Eurozone economy has stalled over the last year, ending June 2023, with quarterly growth of only .3% and .6% year over year. In 2023, the ECB however raised rates another 2% and shrank the monetary base by over 900 billion euros or 14%. This is the largest tightening of monetary policy in Eurozone history.

  • The European Central Bank [ECB] has executed the largest and fastest monetary tightening in history by increasing rates by 4.5% within a year while shrinking the monetary base by over 14% in 2023 (as noted). Large monetary contractions normally cause recessions; as interest rates rise, the housing sector and other investment declines, and there are significant layoffs in these sectors. Consequently, given the magnitude of monetary tightening in Europe, it is not surprising that the Eurozone is entering a deep recession.

  • US Treasuries have performed in line with other benchmark bonds during the most recent sell-off. In our view, US-centric explanations are misguided although strong US growth does have global implications. We do not believe the Fitch downgrade materially contributed to the global sell-off.

  • We believe that the Fitch downgrade was appropriate as the Federal government budget process is broken as there is:

    • no balanced budget requirement and

    • limited restraint on profligate spending by both parties.

  • We expect, however, that the US external deficit of 95% of GDP with a deficit of 5-6% of GDP is manageable as the post-WWII nominal average GDP growth is over 6%, implying that the ratio of debt to GDP will be relatively stable over time.

  • It is noted that fears about treasury issuance post-debt ceiling agreement were largely unfounded as the Fed offset the issuance by reducing reverse repo to offset the increase in Treasury cash.

  • CLICK HERE to go to the most recent adjusted real-time CPI index report from Infrastructure Capital Advisors.

 
Monthly Bond Market Outlook and Commentary

Stock Market Outlook:

We are currently neutral on the stock market as global interest rates have risen and we are in the weak Fall season. We expect the S&P to be range-bound in the 4,200-4,600 range during this difficult season. This view is however conditioned on the bond market stabilizing in the 4.5-5.0% area. Every 40bp move in the 10-year treasury affects the theoretical market multiple by one point.

  • We remain bullish on the market in the 4th quarter of the year. We have raised our target on the S&P to a range of 4,500-5,000 based on 18.5x 2024 EPS estimate of $245 on the low side of the target and under 21x at the high end. As the AI boom unfolds and many AI stocks move from being undervalued to becoming fully or over-valued, the market may trade to the high end of our range.

  • We believe investors can consider using preferred stocks to ride out the normal Fall storm.

  • The Dow is currently only trading at 16.5x 2024 earnings and only 15.4x non-tech eps. This is in line with our estimate of the fair value multiple of 15X at a 4.25% treasury. This indicates that the broad market ex-tech is fairly valued, with tech companies vulnerable to a pullback during the Fall.

  • The economy continues to be resilient and earnings estimates have only declined slightly.

  • Earnings estimates for 2023 and 2024 have been stable this year despite pundits predicting a dramatic decline.

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Monthly Stock Market Outlook Commentary

Fed and ECB Outlook:

The Fed absolutely should not raise rates again this cycle as we expect that data over the next two months will show a softening labor market, decelerating retail sales and continuing declines in reported inflation.


The recent rise in long-term rates could cause the housing sector to decline significantly, triggering a recession in the US. In addition, it should become obvious to the Fed that the Eurozone is headed into a deep recession that could be almost as bad as the Great Recession. We expect the ECB to cut rates during the first half of 2024 and the Fed to cut rates in the second half of 2024 as this Fed is always 12-18 months behind the curve.

  • The September Fed meeting was hawkish as the dot plot for 2023 was largely unchanged. The forecast for the Fed Funds for 2024 rose by 50bp to approximately 5%. The Fed statement did acknowledge that the labor market had cooled somewhat.

  • The labor market has decelerated dramatically over the last 3 months with private payrolls growth averaging only 140k vs. 222k over the prior 3 months, with over 60% of that growth coming from the health sector which is growing on a secular vs cyclical basis due to the aging population and Pandemic effects. The most recent jobs report also showed the unemployment rate rising to 3.8% from 3.5% and wage growth slowing to .2% from .3%.

  • The Bank of England [BOE] has launched an inquiry led by Ben Bernanke to determine what went wrong with the central bank’s policy framework that led it to miss the surge in inflation.

  • The Fed should launch a similar inquiry and revise its policy framework as it raised rates 3 months after the BOE. In our view, this supports our stance from last month that the Fed was even more incompetent than the BOE.

  • The Fed should change its policy framework by targeting a 2-4% range of inflation. The Fed should look at:

    • A variety of measures of inflation including both headline and core for PPI, CPI, PCE, and CPI-R

    • Be more attentive to leading indicators of inflation such as the money supply, housing prices, auto prices, and energy/commodity prices.

  • In our view, the Fed’s hardline adherence to the 2% target has made the Fed the primary culprit during this century in the decline of the middle class as the Fed attempts to depress nominal wages to hit their unreasonably low target.

  • There is consensus that the Fed should raise its inflation target, with a number of research papers supporting an increase and most recently a WSJ opinion piece from Jason Furman advocating for a 2-3% target.

  • Learn more about our investing strategy.

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Monthly Bond Market Outlook and Commentary

Inflation and Market Outlook:


Inflation is now contained even though the Fed does not recognize it:

  • PCE-R (PCE Core adjusted for market shelter prices) is currently 2.0% Y/Y and the last 3 months PCE Core annualized is at 2.1%

  • CPI came in at 3.6% y/y down from a high of 9.1%.

  • PPI is now 1.6% down from 11.7% y/y.

  • CPI-R (CPI using real-time shelter index) is now .9% down from 12.0%.

  • Housing prices are down 1.2% y/y but CPI is estimating that shelter costs are up 7.7% due to a flawed, heavily lagged survey methodology (only 1/6th of the index is updated every month and an outdated survey methodology is utilized)

  • We are bullish on oil but believe the current rally will stall out in the $90-100 range which will contain the impact on headline and core inflation.

  • Wholesale gasoline prices are down sharply over the last month and are now flat for the year.

  • The above indicators are real-time or coincident indicators of inflation with core CPI and PCE being deeply lagged due to slow bleed-through of energy prices and highly flawed estimates of shelter cost. PCE Core will only be down to 4.2% from 5.0% a year ago.

  • The PCE Index has a much higher weighting in medical services at almost 21% vs. 5% in CPI. This makes the PCE measure less desirable as Fed policy has minimal, if any, impact on medical services which is more driven by demographic trends.

  • The Fed’s focus on Super Core services is misguided as the high Super Core number is caused almost entirely by an increase in auto-related services. This increase in auto-related services is caused by the lack of new car production and available inventory due to a chip shortage. We believe this position is misguided because the Fed should not tighten monetary policy to attack supply shocks.

  • A prolonged auto strike by the UAW would be a minor negative as the elevated auto service components of CPI will likely remain elevated.

  • The leading indicators of inflation are

    1. energy prices,

    2. money supply growth,

    3. housing prices,

    4. and auto prices.

We forecast that inflation will continue to be contained as we believe that:

  1. energy prices will stabilize,

  2. housing prices are unlikely to rise significantly with 30-year mortgage rates at a 20-year high of 7.55%

  3. and auto prices and services are likely to moderate as auto production continues to recover.

Recap on Historical Inflation Indicators:

During the 70s energy prices increased an unimaginable 1200% ($3 to $39), which caused 80% of the core inflation during the decade and housing prices rose an average of 10% per year. These two categories accounted for almost all of the inflation during the decade. Real wages declined by 6% detracting from inflation, which proves the labor market did not contribute to inflation.

  • Shelter and the auto sector represent 58% of core inflation. Goods prices drive wages, not vice versa, particularly in the US which is less than 6% unionized.

    • Inflation in the goods portion of autos is down with used car prices down 5.6% over the last year and new car prices now only up 3.5% while motor vehicle maintenance is still up 12.7% y/y and automobile insurance is up 17.8% y/y.

  • We expect oil to have a seasonal pullback when we enter the Fall as demand for refined products declines after the summer travel season ends. A decline would be positive for inflation as there is a 5% bleed-through of energy prices to the core.

  • Housing prices are down almost 1.2% year over year.

  • Chair Volker made a huge policy error by pursuing an ultra-aggressive monetary tightening to fight an energy price shock in the late 70’s.

  • We do not expect the Fed to cut rates until at least June of 2024 as this Fed is almost always a year behind in making the appropriate policy actions. Since the Fed should have cut rates after the banking crisis started in March of this year they will take at least a full year to discern that they should cut.

  • This Fed is fundamentally flawed as it focuses almost exclusively on the discredited Phillips Curve policy framework which focuses on employment and wages driving “inflationary expectations”, “wage-price spirals“, “entrenched inflation” and “Inflation that is more dangerous than a recession. In our view, these conclusions are based on learning the wrong lessons from the 70’s oil price shock and are Urban Myths, often repeated but inaccurate.

    • This Fed completely ignores changes in the money supply which is a huge mistake when the money supply is extremely volatile, which it has been since Powell became Chair in 2018.

    • The money supply is 60% correlated to inflation since 2018.

  • The Fed’s assertion that persistent inflation is a bigger risk than a recession, is not supported by any research. Moderate inflation in the 2-4% is ideal for growth and nominal wages, and recessions are terrible for almost everyone. Very high inflation of 5-10% is a problem but that is not currently a risk for the US economy, and this type of inflation is usually caused by energy shocks, which are terrible for both inflation and economic growth.

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Monthly Bond Market Outlook and Commentary

Commodity Outlook: We expect oil to trade in the $75-95 range while the Ukrainian war continues

  • We expect oil to trade in the $75-95 range while the Ukrainian war continues

  • Recent weakness in oil prices, driving prices below our range, was caused by

    1. Tepid demand in China,

    2. Fears of fallout from the banking crisis, and a

    3. Slight increase in US production.

  • The ongoing European energy crisis is likely to offset weak global demand for oil.

  • The end of the China zero Covid crisis will result in a slow recovery of oil demand.

  • OPEC+ continues to support oil prices through production cuts.

  • The key global energy/climate opportunity is to rapidly develop the natural gas transmission and export capacity of the US.

  • There is a 70% discount on US natural gas prices relative to European prices.

  • Expanding natural gas consumption reduces the consumption of coal. Currently, coal represents over 44% of global carbon emissions.

  • High European natural gas prices are driving fuel oil/distillate prices through the roof as distillate can be used as a substitute for natural gas and is easy to ship.

  • The fastest way to reduce carbon emissions is to drill for more natural gas which will displace the use of coal by energy plants. 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.

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Monthly Bond Market Outlook and Commentary

QUICK TIP: The remainder of 2023 is likely to continue to be volatile with Fed tapering reducing liquidity, inflation continuing, and growth slowing. We at InfraCap will remain focused on large capitalization defensive dividend stocks and preferred stocks that can have lower volatility and benefit from inflation.


 

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Follow InfraCap on social media for announcements on new market reports, exclusive webinars monthly market & economic outlook reports along with many other current market updates or insights plus InfraCap fund news at:


 

Want faster market insights and updates?

Jay Hatfield, CEO & CIO for Infrastructure Capital Advisors LLC

Follow Jay Hatfield's Twitter account for instant updates and insights as he sees important changes and information occurring in the US market and economy. twitter.com/jdhatfield_icap.

 




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DISCLOSURE

Opinions represented on this website are subject to change and should not be considered investment advice. Past performance is not indicative of future results. This data was prepared using sources of information generally believed to be reliable; however, its accuracy is not guaranteed.

Investors should consider the investment objectives, risks, charges, and expenses carefully before investing. For a prospectus with this and other information about the InfraCap Small Cap Income ETF, please click here. Please read the prospectus carefully before investing. For more information, please reach out to William Heffernan at 212-763-8326 or icap-operations@infracap-funds.com.

 

The Funds are distributed either by Quasar Distributors, LLC or by VP Distributors, LLC, an affiliate of Virtus ETF Advisers, LLC. ICAP and SCAP ETFs are distributed by Quasar Distributors LLC. PFFA, PFFR, and AMZA ETFs are distributed by VP Distributors, LLC an affiliated of Virtus ETF Advisers, LLC.

Current income is a primary objective in most, but not all, of ICA's investing activities. Consequently, the focus is generally on companies that generate and distribute substantial streams of free cash flow. This approach is based on the belief that tangible assets that produce free cash flow have intrinsic values that are unlikely to deteriorate over time. For more information, please visit infracapfunds.com.

 

The Russell 2000 Index is a small-cap U.S. stock market index that makes up the smallest 2,000 stocks in the Russell 3000 Index. It is not possible to invest directly in an index. In addition, there is a highly liquid option market according to total option volumes, as of December 8, 2023 *Morningstar ratings are based on risk-adjusted returns. Strong ratings are not indicative of positive fund performance. Morningstar Rating: Five star ranking awards for three year performance was prepared by Morningstar, an independent third party. As of 09/30/2023, PFFA was rated 5 stars out of 64 funds, 1 stars out of 58 funds and has no rating out of 38 funds within the US Fund Preferred Stock category for the 3-, 5- and 10 year periods, respectively. As of 09/30/2023, AMZA was rated 5 stars out of 100 funds, 1 stars out of 91 funds and no rating out of 0 funds within the Energy Limited Partnership category for the 3-, 5- and 10 year periods, respectively. These ratings are not indicative of a fund's future results or the future success of the adviser in managing its other funds. Approximately 10% of funds received 5 star award (top ten) in these categories. These category rankings only reflects two category rankings produced by Morningstar. The Adviser did not pay a fee to participate in the in Morningstar’s rating system. Morningstar ratings do not represent the entire universe of Preferred Stock or Energy limited Partnership funds offered to investors, rather this rating represents a subset of Preferred Stock and Energy Limited Partnership funds. For more information about the ranking and rating process, please contact Morningstar at 1-312-384-4000, or visit https://bit.ly/440AjUT.

A word about SCAP risk:  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 prospectus for discussion of risks. Diversification cannot assure a profit or protect against loss in a down market.  SCAP is distributed by Quasar Distributors, LLC.

 

A word about ICAP Risk: 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, preferred stocks, leverage, short sales, 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, options, 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, options, leverage, short sales, 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 prospectus for discussion of risks. ICAP fund distributor, Quasar Distributors, LLC.

 

Virtus InfraCap U.S. Preferred Stock ETF (NYSE: PFFA): Exchange Traded Funds: 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. 

 

InfraCap REIT Preferred ETF (NYSE: 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.

 

InfraCap MLP ETF (NYSE: AMZA): Exchange Traded Funds: 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. Prospectus: For additional information on risks, please see the fund’s prospectus.

 

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 www.virtusetfs.com for performance data current to the most recent month-end and the Fund’s standard performance information. Past performance is not indicative of future results.

Indices / Performance Terminology Used: For more information regarding the underlying data, calculations, or terminology used, please reach out to us. Please CLICK HERE to see a glossary of terminology and indices used.

 

Privacy Policy:  Protecting your privacy and personal information is important to us. Go to www.infracapfunds.com/privacy-policy to view our full policy.

Past performance is not indicative of future results.

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