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Markets have bottomed and things are looking up for stocks and bonds, which could rally more than 10% in 2023, according to one portfolio manager. Jay Hatfield, CEO and portfolio manager at Infrastructure Capital Advisors, told CNBC Pro that his bullish case hinges on his expectation that inflation will be “declining rapidly.” “We expect 2023 to be a good year for both stocks as bonds with double digit returns in both asset classes likely as inflation and interest rates recede,” he said. Hatfield said he’s more bullish than other market strategists who project the S & P 500 will go to 3,000 as they “believe that inflation is ‘entrenched’ and will take a long time to go away.” The S & P 500 is currently at around 3,839. However, he said that expectation suggests the “wrong lesson” was learned from the 1970s when inflation stayed high in light of the huge energy shocks in those years. “The 70% energy shock that occurred in Q1 2022 has now completely reversed itself,” he added. “In addition, housing prices are now dropping indicating shelter cost will follow.” Hatfield expects the U.S. will avoid a “major recession” in 2023, thanks to its economy’s relative resilience and reopening tailwinds in the services sector. Hatfield predicts S & P 500 will rise to 4,300 if 10-year Treasury yields return to 3%. Based on the current yield of 3.75%, the S & P 500 is “fairly valued” at 3,800 — implying no upside. Treasury yields have shot up this year as investors continue to fret over the possibility of a recession and what that could mean for monetary policy. ‘Conviction themes’ in 2023 Hatfield highlighted the “conviction investment themes” he expects to be very attractive in 2023. One asset class he highlighted was preferred stocks, which have the characteristics of both stocks and bonds . In other words, they trade on exchanges like stocks but, like bonds, they’re issued at face value and pay dividends. They are also like bonds in that when the value of the preferred stock goes down, yields go up. However, they typically offer a higher yield than other fixed income products and can have more risk. “We believe that preferred stocks are extremely attractive now as most are trading at more than a 20% discount to par. If we are correct about rates declining next year as inflation abates, preferred stocks are likely to outperform most other fixed income asset classes,” Hatfield said. The ICE BofA Fixed Rate Preferred Securities index, which tracks the performance of fixed-rate preferred securities, was down around 14% in 2022. Its yield was last around 7.3%. While Hatfield did not give any names, his firm manages the Virtus InfraCap U.S. Preferred Stock ETF. Top holdings include Necessity Retail REIT, master limited partnership NuStar Energy , and DigitalBridge , which operates digital infrastructure such as data centers and cell towers. Hatfield is also optimistic about real estate investment trusts. “REITs are also very attractive as the sector has underperformed the S & P this year due to rising rates and many pandemic recovery beneficiaries have been unfairly punished during the sell off including retail, entertainment and office REITs,” he said. His firm manages the InfraCap REIT Preferred ETF, which offers preferred securities issued by Real Estate Investment Trusts. It includes names such as Digital Realty Trust , which invests in data centers, and Hersha Hospitality Trust, a REIT that invests in hotels.
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