As 2024 begins to draw to a close, investors are cheering a second blockbuster year in the stock market.
And as we enter 2025, will the party continue? Will today's asset prices shrug off the growing litany of macro concerns and power still higher in the new year?
Or will 2025 be a less enjoyable, or even a more painful, year for investors?
I can't think of anyone better to ask these questions to than today's expert, who is among the world's most highly respected living investors, Felix Zulauf.
He thinks we'll be in for a wild ride in 2025, with stocks peaking in Q1, then falling 15-120%, recovering possibly to new highs, and then ending the year with a serious drawdown.
He believes his predicted "decade of the roller coaster" will enter full swing next year.
Here are my key takeaways from this discussion:
Following two exceptional years for the stock market (2023 and 2024), the economic and investment landscape in 2025 is projected to be turbulent. Key risks include potential corrections driven by overvaluation, policy uncertainty from the new U.S. administration, and heightened geopolitical tensions. Investors should brace for volatile market conditions, with significant swings in both equity prices and liquidity levels.
China is trapped in long-term deflation and economic stagnation due to an oversupplied real estate market and a shrinking, aging population, limiting its ability to stimulate global growth. Europe faces declining economic competitiveness, particularly in Germany, due to over-reliance on aggressive green energy policies and alignment with U.S. foreign policy, which has strained its own economic interests. Meanwhile, the U.S. economy has defied recession predictions, driven by a robust labor market and fiscal measures, but uncertainty looms with the incoming administration's policies.
New U.S. trade tariffs could lead to retaliatory measures from trading partners, triggering a global trade war. Europe, with its high export dependency (50% of GDP), is particularly vulnerable, especially in sectors like agriculture and autos. The introduction of tariffs could depress global trade, increase protectionism, and create economic instability that could spill over into financial markets.
Global liquidity remains a critical driver of market stability, but its growth is slowing. Significant injections via reverse repos and other mechanisms have masked systemic vulnerabilities, but these sources are nearly depleted. Japan, a major source of global liquidity through its weak yen and low interest rates, faces pressures that may dry up this flow. A contraction in global liquidity in 2025 could set the stage for severe market corrections and increased volatility.
Markets may experience a peak in early 2025, followed by a 15-20% correction, a recovery to new highs driven by fiscal and monetary responses, and a potential sharper downturn in late 2025 or 2026. The trajectory of these developments depends heavily on the policy stance of the U.S. administration, particularly regarding tariffs, fiscal tightening, and monetary easing.
China’s economic struggles stem from an overbuilt real estate sector with 100 million empty homes and demographic headwinds. Efforts to stimulate domestic demand could weaken its long-term economic strength, and its deflationary pressures are likely to continue for years. This limits China’s ability to serve as the global economic locomotive, a role it played during past crises like the 2008 financial meltdown.
Investors should adopt a defensive stance in equities and real assets like gold while avoiding long-term bonds due to rising yields in an inflationary, conflict-laden environment. Timing the markets and managing exposure to major drawdowns will be essential. Holding safe assets like T-bills and minimizing exposure to high-risk speculative investments can protect wealth during volatile conditions.
The shift from a U.S.-centric unipolar world order to a multipolar system is creating geopolitical and economic disruptions. The "Thucydides Trap," where rising powers like China challenge established powers like the U.S., increases the risk of direct or proxy conflicts. Trade disputes, geopolitical tensions in hotspots like Ukraine, Taiwan, and the Middle East, and the economic impact of shifting alliances add to global instability, with profound implications for trade, markets, and policy.
For the full interview with Felix Zulauf, watch the video below:
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