Four Words… Five Decades of Guidance

In 1970, Martin Zweig coined arguably Wall Street’s most famous four words…

“Don’t fight the Fed.”

More than half a century later, Zweig’s seminal book, Winning on Wall Street, remains reading material for novice and veteran investors alike. And his analysis of the connection between market moves and U.S. central bank monetary policy has kept portfolios on the right side of history for decades.

The basic strategy has two parts.

The first is: When the Fed is slashing rates and loosening monetary policy… risk on!

The longest bull market in history began on March 9, 2009, and stretched all the way to the COVID crash of February 19, 2020.

During this 11-year run, the Nasdaq gained 542% as the S&P 500 rallied 322%!

Well, the rocket fuel for that run was that federal funds rates were kept near zero for years…

But even when the U.S. central bank began raising rates during this free money stretch, it did so methodically. It increased rates nine times by 0.25% between 2015 and 2018, telegraphing every tick higher so as not to shock the market.

The second part of Zweig’s “Don’t fight the Fed” strategy is…

When the central bank starts hiking rates aggressively… risk off!

Prepare for a crash.

On March 16, 2022, the U.S. central bank began hiking rates to tamp down inflation. Most noteworthy is, they did this at the fastest pace since 2007. Most of us still remember how the markets tanked the from the end of 2007 until early 2009.

Well, wouldn’t you know it… history repeated itself.

In 2022 – as the Fed did a series of 0.75%, 0.50%, and 0.25% hikes – U.S. indexes suffered widespread collapse. The S&P lost more than 19.2% of its value. The Nasdaq cratered 33%!

So…

Don’t fight the Fed!

Embroider those words on a pillow…

Cross-stitch them onto a sign to hang in your office…

Tattoo them on your forearm.

Do whatever you need to do to remember this saying.

Zweig’s mantra has guided investors for more than 50 years – and for good reason…

It works!

But we also must realize that we’re about to enter a new phase… and your portfolio better be prepared.

The Beginning of the End

In late 2023, the Federal Open Market Committee (FOMC) decided to end its rate hike campaign. Since then, they’ve held steady waiting for inflation to tick painstakingly lower.

Now, it’ll be debated for decades – particularly if this all ends in tears or a recession – whether the Fed has been too slow to act… whether it will move to early… or it did everything just right to ensure the softest of landings.

But one thing’s for certain…

We now know that a rate cut cycle is fast approaching… maybe even before September. Maybe even we get hints from the annual Jackson Hole Economic Symposium this week and its “unofficial” Fed Day, Fed Chair Jerome Powell’s closing speech.

Regardless, understanding the fact rate cuts are on the horizon – and more importantly, embracing it – will make all the difference in the months and years to come.

For more than two years, the Fed has been trying to wrestle inflation back under control.

Inflation has stubbornly refused to call it quits.

But both are now winded – as are the American people and investors.

The fight is almost over.

The end is in sight.

And that means we must turn our attention away from the obsession over each government data release, monthly sales figure, or crisis of the day… and instead, focus our attention and portfolios on what happens next.

When the Cycle Ends

If you have even a single dollar in the market, this is the data you should be focused on now.

I’ve compiled nearly 50 years of Fed rate decisions and their impact on the markets.

More specifically, I looked at how U.S. central bank moves affected the performance of tech stocks on the Nasdaq.

And here’s what I found…

During rate cuts, we’ve seen the Nasdaq rally in seven of the last 10 cycles…

Of course, the markets have tanked in three of the past four – and that’s because these were emergency situations. The dot-com bubble bursting, the global financial crisis and then the slowing U.S. economy into COVID-19.

Overall, though, the average gain for tech stocks during rate cut cycles is 7.67% since 1980.

That’s not great. And that big 40%+ loss during the financial crisis really brings down the overall average.

It’s also important to keep in mind, rate cut cycles don’t last a particularly long time. The U.S. central bank uses these to help normalize the economy.

And once a rate cut cycle ends, here’s how the Nasdaq performed over the next year…

This is when equities are off the leash, and the average gain one year out is 33.1%!

But here’s the headline takeaway and to keep in your back pocket…

On average, the Nasdaq is up 22.67% a year after a rate cycle ends. That includes both rate hikes and cuts.

The last time the Fed hiked rates was July 2023. A year later, the Nasdaq was up 22.87%... dead in line with that average. And we’ve continued higher since.

Starting in 2023, I began pounding the table for investors to stop getting wrapped up worrying over the intraday or day-to-day moves in the market.

Get off that emotional roller coaster!

The primary focus shouldn’t be where the Nasdaq is going to be at the close of today’s session or tomorrow or even next week or next month. Our focus should be on where the market is going to be a year… two years from now.

We know we’re near the beginning of a new rate cut cycle.

History tells us what to expect.

Martin Zweig outlined why we shouldn’t fight the Fed more than half a century ago. And that’s timeless guidance we still use to this day.

Prepping now for when the trim ends,

Matthew

P.S. I was on a short vacation the last couple of weeks, taking some much needed time to do some repairs and work around the farm. I also dove into reading some other financial analysts and found one my readers may enjoy…

So, be sure to check them out!