Caution should not be thrown to the wind when the Fed hikes rates. Sure, the market can go higher, but you have to be more skeptical of upward moves when money costs more, the true interpretation of a Fed rate increase.
What makes me say that? Because I have studied these situations all my life and it's the right conclusion. It's right even if I am blasted in social media for being too cautious by saying I am circumspect. I am not going to say, "You know what? Rates going higher? Irrelevant."
Because it's never been irrelevant. Never. That's what history shows, both in the time since I have been involved in the market and in times long since past.
How do I know this? Marty Zweig. That's how. Marty, who passed away a little more than two years ago, was among the great titans of our industry. He knew more about the history of the market than anyone I have ever known. He was one of Lou Rukeyser's frequent guests and I devoured everything he ever said. He was an inspiration to me and millions of others and I credit his incredible work with helping me and countless others to decide to go to Wall Street and try to make money in the stock market, which he encouraged everyone to try to do.
Marty had many witticisms and core beliefs, but central to his thesis of investing was "Don't fight the Fed," meaning when the Federal Reserve was raising rates you had to be cognizant that the wind has gone from your back to your face. A tailwind has become a headwind.
That's because he found that interest rate movements and Federal Reserve policy were dominant factors in determining the overall market's direction. When the Fed raised rates, Marty emphasized, it was bearish for stocks. When it cut rates, it was bullish.
Now you could say if Zweig was right, then it is game over. Turn the lights out. Nothing more can be done to make money.
Zweig also taught you to be flexible and not to be too dogmatic. He didn't want you to leave the market when the Fed started raising rates. He wanted you to be less positive.
So I am less positive. I can't help it. Marty made me too much money with that philosophy and I can't go against it. As he wrote in Winning on Wall Street back in 1986: "What you are concerned with is the probability of success, or alternatively the probability of losing money. You want to avoid a loss, so it is fine to buy above the bottom and to sell below the top."
Zweig wrote these points because he knew higher interest rates meant more competition for your investment dollars from fixed-income instruments and it meant higher costs for companies that want to run their businesses, grow their businesses or borrow money to buy back stock. Those are meaningful headwinds in a time when stocks have had a monstrous run over many years and many equities are no longer cheap vs. their growth rates.
I wish I could send everyone on Twitter a copy of his book, but if you don't have time to read it then please go to the wonderful obituary old friend and columnist Howard Gold wrote for MarketWatch titled, "What Marty Zweig Can Teach Us Now." You would then know that you are going to miss some gains, maybe big ones, being more cautious than you were, but that's what the odds say. Consider it blackjack where the odds favor you not hitting on 17 because you are more likely to bust than beat the dealer because there are many more cards higher than a four, the highest card that would make your cards up to 21.
But, to belabor the analogy, sometimes it's tricky. If you have a 13 or 14, you might have to hit in certain circumstances. That's the flexibility I am talking about, and Zweig never wanted you to leave the table entirely.
Why risk it? Yesterday I read a piece in TheStreet.com that had some pretty compelling figures. When quantitative easing, the furious pumping of money by the Fed, began in November 2008 until it ended in October 2014, the S&P 500 climbed 130%. Pretty darned impressive. But ever since the Fed concluded its QE2 policies 14 months ago, the S&P has only advanced 4%. To me, that's what happens when the tailwind stopped. It made it much harder to make money.
People might not want to hear anything cautious from me, or might think that I am keeping you out of the big gains like yesterday's 200-point rally. But you have to think longer than a day or two in your investment horizon or I can't help you. Go to someone else. That's fine with me. I have my disciplines. And discipline always trumps conviction in any stock or sector or the market as a whole. You need to develop yours.
Remember, though, that Zweig preached flexibility and didn't want you to give up. And I can only imagine that he might be saying, "Look, you are fighting the Fed even when it raises rates just a quarter of a point like it did yesterday, but it is off such a low base that I wouldn't be too negative." I could see him being constructive about the Fed's decision to go slowly and be data dependent rather than to take up rates by lockstep in autopilot.
And perhaps most important, I could see him say, "Don't give up the hunt." For example, TheStreet pulled the top 10 gainers since QE2 ended and they are incredibly instructive about why you shouldn't take your bat and your ball and go home even as today's a miserable day.
I would contend that many of these stocks are accessible and the gains obtainable if people do some homework and decide they can own companies that make products or provide services that they love.
First up, Amazon (AMZN), which gained 123% during this period. Amazon's killing it. I know it. You know it. In the last year, we found Amazon could, if it wanted to, show a huge profit either by raising the cost of Amazon Prime, which it could do with little resistance, or slowing down its worldwide buildout. But it wants to dominate and I want to be a shareholder in a dominator. (Amazon is part of TheStreet's Growth Seeker portfolio.)
Next up, Netflix (NFLX), plus 119%. I don't know about you, but I would easily pay double what I pay now for Netflix, because in addition to its library, it has must-watch shows available only on Netflix. We love House of Cards, Orange Is the New Black, Narcos and Jessica Jones. The opportunity worldwide here is just too big to be contained by this company's current $52 billion market capitalization.
The next three are all of a piece: Activision Blizzard (ATVI), up 103%; Electronic Arts (EA), plus 85%; and Nvidia (NVDA), increasing 75%. The first two make video games and the third makes high-performance chips that also happen to be ideal for video games.
The next one, Total Systems Services (TSS), would have been inaccessible to most. You probably wouldn't have nailed that 71% gain unless you knew how fast-growing the payments processing business is. Same with Avago (AVGO), the aggressive semiconductor company with a stock that's advanced 68%, although I have featured this company many times as a key chip supplier for cellphones, including Apple (AAPL), as well as a terrific player in the Internet of Things world. (Apple is part of TheStreet's Action Alerts PLUS portfolio.)
Expedia's (EXPE) next, up 63%. I've been wise to this one ever since I took an ownership stake in the Debary Inn, a 17-room bed and breakfast in Summit, N.J. Holy cow, it didn't take me long to realize that the key to getting bookings was to allow your hotel computer system to talk to the Expedia system. It's the most powerful reservation system on Earth.
Cablevision (CVC) and Vulcan Materials (VMC) finished ninth and 10th in the S&P, both with gains of 60%. Cablevision rallied because of a takeover bid and I think it was a possibility that you might have owned it if you just listened to my CNBC colleague David Faber, who talked endlessly about cable consolidation. Vulcan's a stone company, and it's done well because of an increase in housing starts. Tough to get? Maybe. But certainly not impossible given that I have featured its competitor, Martin Marietta Materials (MLM), several times on Mad Money.
I don't want to get sidetracked, though. Marty Zweig taught me not to fight the Fed, but be flexible at the same time. I think that means keeping your eye out for good companies and wait until their stocks dip to prices you like. Just don't be as aggressive as you might have been and don't let gains turn into losses because of too much greed or confidence.