Last week brought the sad news that Martin Zweig had died at the absurdly young age of 70.
Many tributes to him (which included this insightful commentary by Mark Hulbert in MarketWatch) recalled his memorable appearance on Wall Street Week with Louis Rukeyser on October 16, 1987, where he warned of a stock market crash.
It happened the very next trading day, and Zweig’s reputation as a forecaster was sealed. (You can watch the video here, starting about six minutes in.)
Still, that understates his importance. A numbers wizard (he got a PhD in finance from Michigan State), Zweig saw patterns in the market no one else could. His newsletter, The Zweig Forecast, had a stellar track record, according to Hulbert, and he ran a successful hedge fund with his business partner Joseph DiMenna.
Zweig, who famously purchased a multi-story penthouse apartment in New York City’s Pierre Hotel for a record $21.5 million in 1999, had a net worth estimated in the hundreds of millions of dollars.
Martin Zweig made the mother of all market calls when he predicted
the 1987 crash on PBS television. The very next trading day, the Dow had
its worst one-day drop in history, losing 22%.
But he also had a simple philosophy that can help ordinary investors navigate even the most treacherous markets. By sticking to it, investors can participate in the upside while limiting downside risk. Many people claim to have done that, but Zweig actually did.
I interviewed him back in the late 1980s as a much younger reporter at a small, feisty business paper in Miami, where he spent some of his formative years. He didn’t give many interviews (and none I could find recently), but he was gracious, and his passion for investing was evident. I recently re-read his first book, Winning on Wall Street, originally published in 1986. The many stats are dated, but the insights are just as timely today.
Zweig’s nostrums are well known—“Don’t fight the Fed,” “don’t fight the tape”—but they shouldn’t be taken for granted. Used correctly, they’re a recipe for making money and reducing risk.
"Don't Fight the Fed"
“Monetary conditions exert an enormous influence on stock prices,” he wrote in Winning on Wall Street. “Indeed, the monetary climate—primarily the trend in interest rates and Federal Reserve policy—is the dominant factor in determining the stock market’s major direction.”
“Generally a rising trend in rates is bearish for stocks; a falling trend is bullish,” he continued.
Why? For two reasons. “First, falling interest rates reduce the competition on stocks from other investments, especially short-term instruments such as Treasury bills, certificates of deposit, or money market funds,” he wrote.
“Second, when interest rates fall, it costs corporations less to borrow. As expenses fall, profits rise...So, as interest rates drop, investors tend to bid prices higher, partly on the expectation of better earnings.”
Isn’t that exactly what’s happening now? After resisting for years while the Fed drove real short-term interest rates below zero, investors have jumped back into U.S. stock mutual funds and ETFs.
And companies have zealously controlled their expenses and have refinanced every bit of debt they could at rock-bottom rates. No wonder corporate profits are at their highest percentage of GDP in more than 60 years.