Based on his big picture macro-outlook, Felix Zulauf told Financial Sense Newshour listeners last August that he expected three likely outcomes: the US stock market would rally (regardless of who was elected) until around Spring of 2017, the US dollar would push higher in an ongoing bull market, and the strong 2016 rally in gold and gold mining stocks was likely over with most of the risk now to the downside.
Given how well those calls turned out (the Dow is up 13% since we last spoke with him, the GDX gold mining index is down 26%, and the US dollar is up 4%), Zulauf, head of Swiss-based Zulauf Consulting, provided our podcast listeners an update on his outlook and the trends to watch for 2017.
All Eyes on Europe This Year
Zulauf highlighted the importance of at least three major elections taking place in Europe in 2017 that are likely to exert a major influence on currencies and global markets.
When it comes to greater or lesser integration among European members and the fate of the euro itself, elections in “France could be a game changer, and very late this year or early next year, Italy could be a game changer,” he said.
“The problems in Europe started with … the introduction of the euro,” he said. “The currency is not right for anybody. It is cheap for Germany, it is too expensive for Italy, and it creates all sorts of messes.”
If Marine Le Pen wins in France, who wants to pull out of the EU, Zulauf believes we’ll see a selloff in the the euro and European assets.
The world will be very fearful of Europe entering the next stage of a slow, decaying process of the current institutional architecture, which will cause capital to move out, he said.
The Rise of Inflation
Regarding the Fed's third rate hike last week, Zulauf told listeners to keep in mind that what we are seeing is the beginning stages of monetary policy changes towards less easy-money and even toward some tightening. That means the major force behind this bull market is going to disappear, he said.
Zulauf thinks the next 12 months will be crucial, especially when it comes rising inflationary pressures, which Zulauf cited as "the most important (fundamental) change" currently.
Inflation — specifically core inflation and not headline inflation — is coming back, he said, and will continue to creep upward during the rest of this year and next year. This is a global phenomenon, Zulauf added.
“The impact could be quite dramatic,” he said. “Inflation will continue to creep up, and inflation in many countries is already above declared target levels.”
Coming Bear Market
When it comes to the US stock market, Zulauf believes that we are in the latter stages of the 8-year bull run.
“If you want to be neat and write the script for the stock market, I would say expect some choppiness and corrective action into maybe late May for the next 6-8 weeks and then another attempt higher,” said Zulauf.
At that point, he's anticipating breadth and momentum to weaken, indicating the formation of a major market peak.
“Because of the excesses we see today, I think we will see an above-average bear market that will probably bottom in 2020 – I cannot say how deep it will go – I just want to first see the highs in place and all the non-confirmations, which may be seen in the next six months.”
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