When we spoke with legendary Swiss investor Felix Zulauf, head of Zulauf Asset Management and Zulauf Consulting, earlier this year in 2021 about his global macro outlook, when it came to the stock market he explained that US stocks were likely to see a continued push to new all-time highs for most of the year before reaching some sort of peak around 2022.
Here's what he said when it came to historical market cycles:
Zulauf: “I think what started in March 2020 was the beginning of the fourth (bull market) cycle since 2009…and if you look at market cycles—if the past is a precursor to the future—about every seven years or so, you have a top: 1987, 1994, 2000, 2007, 2015, and 2022 would be the next one.”
In the context of prior cycles, Felix also pointed towards extremely loose monetary conditions and ample liquidity from governments as significant tailwinds for higher stock prices throughout 2021 before reaching another peak (see Felix Zulauf on Global Planned Economy, Massive Stimulus, and Current Bull Cycle airing February 17, 2021 for audio; total run length: 34 minutes).
Given how well his 2021 forecast and macro outlook played out, FS Insider caught up with Felix again for another 30-minute conversation about what he expects for the next year. Here’s a portion of what he had to say about his 2022 forecast (see Felix Zulauf on Market Peak, Energy Crisis, and Buy Signal for Gold airing December 16, 2021 for audio; total run length: 30 minutes)
So, Felix, last time we spoke at the beginning of this year in February, you explained how you saw this as the fourth bull market cycle with a potential market peak in the 2021-2022 timeframe. Given what has taken place this year, do you still think that we are looking at a peak in the market cycle now or next year?
"I do believe that we are looking at a very important medium-term peak. But I do not believe that is the end of this current market cycle. I think the market cycle will most likely stretch into 2024. But what we are facing now is a is a medium-term top in the next few weeks, and then a very decisive decline. And this is because, first of all, I see the world economy weaker or slowing (faster) than the consensus. I think the overshooting of retail sales on the pre-pandemic trend by 16% in the US, is an aberration and will be corrected because the fiscal impulse that was so positive will turn negative in 2022, negative by about 4 - 6%. This will dampen economic activity; real personal income is now negative and not positive anymore. I think the rest of the world is slowing too, particularly China, which continues to slow and is in a recession and will most likely stay in a recession into midyear. And while they are loosening up the tight policies, they are not stimulating yet. I expect that (to happen) from spring on, only not before. And all of this tells me that the world economy and the US economy will most likely disappoint in terms of growth, and particularly in the first half… Usually when a market corrects, you have a plain vanilla 8 - 12% correction or anything on that order. But we have had tremendous excesses of capital flows into equities. US equities, including equity products, was on the order of over $1 trillion in the last 12 months. And this compares to the same amount for the last 20 years combined. So, this is an excess of a century. And usually, when you go into a correction, highly positioned, highly leveraged, high margin accounts surprise on the downside. So, it's very possible and conceivable that when we have usually a 10% correction, all of a sudden, it could trigger a 20 - 30% correction. And therefore, I think the first half of the year, will most likely show a very serious correction. And that could shake the authorities. And instead of the interest rate hikes that the Fed has been forecasting, I think they will rather turn around and stimulate again around the middle of the year, when the correction in the market arrives. And that should give us the next run-up to new highs. So, I could see equity indices, declining 30%, and then go up 100% to the Peak in 2024. And if the peak in 2023 - 2024 is a better economy, I think you will have another run in the commodity complex; you will have wages going higher, and you will then see the CPI probably around 10%. And, at that time, you have higher bond yields, and you have a central bank and probably around the world that has no choice but to tighten. And that I think will be the end of the bull market that we have been seeing from 2009. And that will lead to major crises probably for a few years thereafter. So, the big picture has been stretched a little bit. But, nonetheless, I see a serious and painful decline in the first half of 2022."
So you believe we’ll see a very important medium-term peak over the next few weeks with a decisive decline in the first half of next year. And, like you said, we could be looking at something greater than an 8 - 10% correction, something as large as 20 - 30%. So, in that case, it sounds like at this stage, you're fairly defensive, possibly raising cash or sitting on large amounts of cash given what you see?
"Absolutely. I have raised cash. I have hedged what I have left in the portfolio and it's much more defensive. Now, I think the defensive sectors will do better: the utilities and consumer staples will do much better during the correction than the high tech and the cyclical stocks, and I'm looking for short-selling opportunities over the next few weeks for a big decline. The breadth of the market has been weak for several months now. And when you go deeper into the market, you see that 65% of the NASDAQ stocks have already declined 20%, or what some people call a bear market decline. And actually, almost 40% of the NASDAQ stocks have declined 50% or more. And you do not see that because you have a handful of stocks in the S&P 500 and in the NASDAQ that dominate those two indices to such a large degree that you do not see what's going on under the surface. But it's really the picture of the generals running in one direction and the army moving backwards in the other direction. And this is not how you win the war."
In the remainder of this wide-ranging interview with the legendary Swiss strategist and investor, Felix Zulauf explains what we see happening with global liquidity and how he believes this will impact stocks, commodities, energy, and precious metals over the next year and beyond. Felix also provides his big picture outlook on China in light of Evergrande’s recent default, what he expects in terms of their longer-term trend growth and impact on other markets, in addition to explaining his view on the energy crisis currently underway in Europe. This is one interview you won't want to miss!
To listen to this full audio interview, see Felix Zulauf on Market Peak, Energy Crisis, and Buy Signal for Gold or, if you’re not already a subscriber to our FS Insider podcast, click here to subscribe.
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