In a recent interview with FS Insider, well-known investment strategist Felix Zulauf of Zulauf Consulting discussed his macro outlook for 2024, including a bull run in the stock market into the first quarter of 2024 followed by the potential for a sharp decline.
In our prior conversations, Felix correctly called the December 2021 peak in the stock market and then made another great call when we caught up with him after the October 2022 bottom to go long growth stocks for a rally in 2023.
Given his highly sought after insights on the market and economy, we were fortunate to get an update on what Felix expects for 2024 and looking out even more long-term when it comes to the US stock market, bonds, inflation, the US and global economy, as well as precious metals and commodities.
Here's what he had to say in a recent must-listen interview on our FS Insider podcast (see Felix Zulauf's 2024 Outlook on Stocks, the Economy, and Commodities for audio):
“The way I see it is we had a mini bear market in 2022 and now we have a mini bull market into probably the first quarter of 2024, when I expect the market to top… I may have said on your show last time in late 2021 that we are in for rollercoaster years in the markets…and we will get more of that with extreme moves.”
Though the US stock market is currently running to the upside with investor sentiment quite optimistic about the future, Felix believes 2024 will quite volatile.
“The percentage decline could be quite sharp next year and it could be one of the few years in history that sees an important high and an important low in the same year,” Felix told listeners.
Record High Concentration
A particularly concerning aspect for Zulauf is the record level of concentration into the so-called Magnificent 7 technology companies: Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla. This overconcentration is fueled by the trend towards index and passive investing, wherein a significant portion of capital is allocated towards a select few stocks that dominate these indices.
“When you think about it, if somebody out there in the world invests according to the world index, 62% of the money goes into the US stock market. And out of that money, 30% goes into seven stocks. And if you are a money manager, you have to own those seven stocks at least in proportion to their weighting in the index. And if you want to outperform, you have to over own them. So the concentration must be extreme.”
Such a situation is perilous because it means that a market downturn could lead to a brutal selloff in these stocks, exacerbated by their heavy ownership, thereby leading to even steeper declines.
As exemplified by Zulauf's analysis of the investment landscape, preparing for the various phases of market sentiment—from disbelief to belief to overbelief—is critical for investors who wish to capitalize on upswings while protecting against the inevitable downturns. The psychological underpinnings of these market phases should not be underestimated, as they can profoundly impact investor behavior and by extension, market movements.
In light of Zulauf's anticipations, an active reassessment of positions when markets hit new highs is crucial. The celebratory rhetoric that often accompanies new bull markets can indeed be enticing, luring in fresh capital and bolstering valuations to often unsustainable levels. Zulauf's characterization of this phase as a potential "trap" for the unwary could serve as prudent advice for those looking to time their exit and entry points strategically.
“The magnificent seven are great companies. They have performed very well, and they have become a fad in a sense. And their valuation is excessive, of course. And the reason for the flows into the US is simply because the world is changing and the world is becoming less safe and capital is looking for safe harbors…and in combination with the fashion of passive investing, it really lifted those stocks to unbelievable heights. And the more they rose, the more money they attracted. So this is coming to an extreme.”
Given the record level of concentration and typical swings in public sentiment from fear to greed, which he believes will likely reach a peak in the first quarter of 2024, Felix expects the next decline could take the S&P 500 back down to the October 2022 bottom or even lower.
The Next Bull Cycle
Once the excessively optimistic sentiment reaches its peak in 2024 and swings back to fear in the next big decline, Felix told listeners that he is going to be positioning for another powerful bull cycle. This time, however, he believes it will be accompanied by another wave of inflation and commodity prices.
“I think the next bull cycle from wherever it starts, in my view, from the low 3000s [on the S&P 500] will be a very powerful one. And we could go to 6000 or 7000 on the S&P because the liquidity they inject will not be used up by the real economy, because the real economy is structurally in a weak condition and therefore it flows into asset prices and equity prices. And commodity prices will go up. And as commodity prices rise, so will inflation. So we will then have the next inflation cycle from a 2024 low to maybe a 2026-2027 high.”
To listen to this full audio interview, see Felix Zulauf's 2024 Outlook on Stocks, the Economy, and Commodities. If you’re not already a subscriber to our FS Insider podcast, click here to subscribe.
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