Over the next decade, the total return for U.S. or global equities will be nearly zero, according to Felix Zulauf.
Zulauf’s underlying thesis was that markets and economies behave in predictable cycles, and the next decade will be a “roller coaster.”
Q1 2023 hedge fund letters, conferences and more
If you can time the cycle, he said, you will do considerably better. But he acknowledged what our readers already know: Market timing is out of fashion and very difficult to do well.
Zulauf is the president and founder of Zulauf Consulting. He has worked in the financial markets and asset management for more than 40 years. Felix publishes a global macro research service and is a consultant to investment firms and family offices around the world. He regularly publishes an investment report about his views on various macro topics and the financial markets.
He spoke virtually at John Mauldin’s Strategic Investment Conference (SIC) on May 8.
Cycles are imprecise and hard to predict, Zulauf said, but they are a normal component of business and economic activity. We are in the secular bull market of a cycle that began in 2009 and had dips like in 2020. The cycle will continue through weakness in late 2023 and early 2024, and end in 2026.
He expects “higher highs” in U.S. equities in 2024-2025, and a “big problem thereafter.” Indeed, he said we are a few weeks from an interim high in equities before the next down leg.
Zulauf expects the debt ceiling to be raised, but that will bring on a supply of $1.4 trillion of new Treasury bonds, pushing yields up. The economy will weaken in the next 12 months, he said, and equities will sell off, followed by a weakening in commodities, and the Fed will respond by easing monetary policy. Over the next few years, he said bonds are unattractive.
The weakening in the economy will be due to “profit problems,” he said. Zulauf said that earlier this year, the yield curve was the most steeply inverted it has been in 40 years. That indicated we are nine months from a recession, which he expects in September or the fourth quarter. That recession will bring the yield on 10-year Treasury bonds down to 2%.
“When an inverted yield curve begins to flatten,” he said, “it is the start of a recession, which means we are very close to the beginning of a recession.”
When a recession begins that was triggered by an event (e.g., the pandemic), usually stocks decline for three months. If the recession was policy induced (which is the case now with the Fed tightening), stocks decline for six to nine months, according to Zulauf.
“Sometime in the next six months will see the low for the cyclical correction,” Zulauf said.
Read the full article here by Robert Huebscher, Advisor Perspectives.
