In his last interview as part of the Barron's Roundtable, from which he is retiring at the end of the year after three decades of participation, Felix Zulauf, owner of Zug-based Zulauf Asset Management had some parting words of caution. First, in his discussion of stocks, Zulauf said "markets exhibit the signs we usually see going into a peak. My trend and momentum indicators are still bullish, but excesses are building up as stocks and sectors move too far above their moving averages. Investor-sentiment readings are getting excessive. July or August could bring an important peak in stocks." Comparing to previous episodes of market exuberance, Zulauf said that "today seems like late 1999. We haven’t seen the peak yet. Much depends, as noted, on whether China continues its current policies. Either way, there is a window of vulnerability in the markets. I’m not talking about a 5% setback. It could be 20% from August to November." As a reminder, this is what late 1999 looked like, and how it is oddly similar to the S&P tech sector currently...
What could catalyze such a drop: "The popularity of passive investing could enhance the selloff. Once the quant models and algorithms change, models that have said buy, buy, buy for years suddenly say sell, sell, sell. This has nothing to do with the economy or fundamentals."
Discussing how policy could affect markets, Zulauf believes that it will be up Trump to pass his much delayed fiscal program to push markets higher from here: "If the Trump administration doesn’t launch a stimulus program by early 2018, the Republicans could have big problems in the midterm elections. That’s why I think they’ll come up with a program. If so, it would probably drive the 10-year Treasury’s yield up to 3%, and the market would shift toward more cyclical and value stocks."
# Finally, here is his outlook on the near term:
I don’t. Investors should tighten risk-management strategies to their portfolios. I expect the FANG stocks and the Nasdaq to have a big selloff. They could easily fall 30% or 40%. But I don’t want to end my Roundtable career on a bearish note. Once the bear market is over and the recession or economic crisis passes, stocks will go up again.
# Of course they will, but what size will the Fed's balance sheet be then?