October 2022 Market & Economic Outlook Report
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We believe the US economy is very resilient relative to the rest of the world and will avoid a major recession in 2023. We also believe inflation is declining steadily and corporate earnings are likely to continue to be resilient.
The Fed has decreased the money supply by 17.5% so far this year, which has caused the dollar to appreciate and mortgage rates to skyrocket. This will set the stage for inflation to decline over the next year.
The key risk to the economy is an erratic and incompetent Fed that has a horrendous track record of forecasting inflation. We are near-term neutral on the market as an overly hawkish Fed and bad seasonal factors weigh on the market resulting in an S&P range of 3,600-4,200 during the Fall.
Stock Market Outlook:
The recent rise in interest rates has caused our fair value estimate for the S&P to drop 700 points to 3,800, based on the current 10-year interest rate of 3.70%. We expect the stock market to rally in the 4th quarter as inflation continues to decline, long term interest rates decline, we enter earnings season, and the election results are confirmed.
We do not expect a major recession in the US in 2022 due to a very resilient housing sector with an ongoing shortage of housing and tail winds from the enormous 80% US energy cost advantage relative to the rest of the world. We expect 2022 economic growth to slow dramatically into the 0-2% range due to erratic and very hawkish monetary policy.
We expect a slow-down in the housing sector but no major decline in construction, which would result in a recession as we have a shortage of homes in the US. The ratio of households to houses is approximately 110% which is below the average for the last 50 years and well below the peak of 120% reached during the financial crisis. In addition, the total inventory of houses for sale is at an all-time low of 1.3MM homes vs. 4.5MM homes for sale at the peak of the 2009 financial crisis. The national vacancy rate is close to an all-time low of 5.0% vs. the peak of 11.1% during the 2009 financial crisis.
The Bank of England’s intervention in its bond market demonstrates that the Fed is too hawkish and is crushing the global economy. The rest of the world is suffering from the ultra-strong dollar, which makes their prices rise substantially and forces other central banks to follow the Fed and adopt an ultra-hawkish monetary policy. Such other countries with weaker economies are unlikely to be able to weather the adoption of an ultra-hawkish monetary policy.We expect that 10-year treasury bonds will find a bottom in the 3% yield area, which should help to stabilize the stock market.
There are $52 trillion of global pension assets which will rebalance and reallocate into treasuries if yields are significantly above 3%, capping the potential rise in rates.
Global growth and demand for credit is likely to be sluggish in Europe due to the energy crisis, in China due to regulatory crackdown and in the US due to hawkish Fed policy and a large reduction in the government budget deficit. The US 10-year is 1.5% higher than German 10-year. Japanese bonds are near zero.
We expect oil to trade in the $90-110 range while the Ukrainian war continues with European natural gas prices at the energy equivalent of oil being at $360/barrel. We recently reduced our target by $10 to reflect a very strong dollar as 80% of oil is produced and consumed overseas.
Global oil prices are supported by the energy crisis in Europe, where natural gas is trading at the energy equivalent of oil being at $300/barrel. These unprecedented prices are pulling in all types of other energy as companies try to limit natural gas consumption.
It is not possible for the US to stop using hydrocarbons as wind and solar only represent 4% of US energy production and are extremely difficult to expand rapidly as siting/NIMBY issues are huge barriers to expansion. We believe that the fastest way to reduce carbon emissions is to drill for more natural gas which will displace coal.
Our ETFs update positions daily, so investors can easily track what defensive dividend stocks, including preferred stocks, we favor. The remainder of 2022 is likely to continue to be volatile with Fed tapering reducing liquidity, inflation continuing and growth slowing so we continue to focus on adding large capitalization defensive dividend stocks that benefit from inflation.
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.
This material is for informational purposes only. This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. The information herein represents the opinion of the author(s), but not necessarily those of ICA, or its affiliates. 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. *30-day SEC Yield is a standardized yield calculated according to a formula set by the SEC and is subject to change.
FUND RISKS Investors should consider each Fund's investment objectives, risks, charges, and expenses carefully before investing. For a prospectus with this and other information about the Fund, please visit the Fund's webpage. Please read the prospectus carefully before investing.
ICAP Exchange Traded Funds (ETF): 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. Distributor, Quasar Distributors, LLC
PFFA 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. 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.
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, regulation, 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 the AMZA fund webpage at 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 which contains this and other information about the Fund. The prospectus should be read carefully before investing.
Virtus ETF Advisers, LLC serves as the investment advisor and Infrastructure Capital Advisors, LLC serves as the subadviser to PFFA, PFFR and AMZA. These three funds are distributed by VP Distributors, LLC, member FINRA and subsidiary of Virtus Investment Partners, Inc.
Past performance is not indicative of future results.
The links to the fund fact sheets will provide standardized performance and risk disclosures.
© 2022 Infrastructure Capital Advisors, LLC
© Infrastructure Capital Advisors
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