My mentor Marty Zweig is often credited with the saying, “Don’t fight the Fed.”
I met Marty in 1995. Not long after that, I heard the now-famous phrase for the first time.
As I’ve alluded to before, Marty believed in using quantitative systems – or “models,” as he called them. He proved that they could determine all sorts of things in the stock market.
Marty’s models fell into two major categories… Some would help you pick stocks. And others would help you determine how much to invest in those stocks.
I’ll talk about one of Marty’s specific models today. You’ll see that it’s tied to his now-famous phrase. And more importantly, it’s critical for investors to remember right now…
Before long, I started managing billions of dollars for Marty. And you better believe I used his models, too.
You see, smart investors lean on their own knowledge and experience. But Marty knew that a repeatable investment process needs to start with a disciplined approach to the markets.
At Zweig Mutual Funds, we followed one key factor to determine how much to invest at any given time. Marty referred to it as the “monetary indicator.”
The monetary model as a whole factored in all sorts of data. It combined interest rates and other measures of Federal Reserve activity into a single model. And of course, Rule No. 1 was always “Don’t fight the Fed.”
When the Fed is cutting interest rates, it’s known as “easing.”
Easing generally provides a tailwind for the stock market. That’s because low interest rates make the payments on debt cheaper. And in turn, cheaper debt makes doing business easier.
Conversely, when the Fed starts raising interest rates, it increases the cost of borrowing money. You’ve likely heard this part of the cycle referred to as “tightening.”
This topic isn’t a touchy-feely kind of thing, either. Entire books detail how the actions of central banks around the world – like the Fed – influence the business cycle.
In short, the Fed’s actions can swing the stock market and individual stocks in a big way.
We’re seeing that today…
The Fed is raising interest rates again. And the media is busy predicting how many times the central bank will “tighten” over the next year.
But I worked alongside Marty for 18 years. So for me, it’s simple… Don’t fight the Fed.
What does that mean for you?
The stocks you buy have to align with today’s uncertain market environment. And with the Fed’s plan to keep tightening, you need to be prepared for the broad market to struggle.
After all, the recently inverted yield curve could be a precursor to a recession. So it’s more important than ever that you minimize your mistakes while navigating this market.
To do that, you should look for strong stocks in strong industries.
And be sure to learn about our company founder Marc Chaikin’s “rolling crash” thesis. He covers what’s happening, as well as how to find the stocks most likely to soar.
At the minimum, make sure you have a repeatable investment process. And make sure it includes not fighting the Fed.
Good investing,
Carlton Neel
