One of the wisest investors who also taught and wrote about investing that I have come across was Martin Zweig, who died this year at the age of 70. Perhaps his wisest observation that has been repeated ad nauseum in investment circles is “Don’t Fight the Fed.”
Zweig understood the powerful effect of the Federal Reserve upon equity markets. When the Fed under Paul Volcker was fighting inflation with a series of monetary moves designed to put the brakes on an overheated economy through the use of rising interest rates, it was folly for an investor to ‘fight’ this by investing in a bullish fashion. The Fed will win and stocks will fall.
Now, the Fed is faced with a weak economy, and is dropping interest rates and utilizing quantitative easing to boost the money supply, dampen interest rates and stimulate markets. Don’t bet against the central bank. The Fed will win. As it usually does.
Thus as the question turns to Fed Taper or Not, investors focus with almost obsessive attention on the actions of the Fed in no small part due to the wise teachings of the late Martin Zweig. But investors should not ignore the why of the Fed decision to slow the monetary stimulus it has been injecting into the economy. In other words, it is good news that the economy is strong enough to allow this Fed action.
Simply put, what the Fed is doing is taking its lead foot off the gas pedal a touch as the economy is gaining speed. It will still feed stimulus to stoke the fire of business, but at a slightly slower rate. This is no reason to panic. There is a big difference between easing off the gas and applying the brakes.