Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
When A 16-Year-Old Earns $3 Million, You Know It's Not A 'Silly Fad' - 24th Aug 19
The Central Bank Time Machine - 23rd Aug 19
Stock Market August Breakdown Prediction and Analysis - 23rd Aug 19
U.S. To “Drown The World” In Oil - 23rd Aug 19
Modern Monetary Theory Could Destroy America - 23rd Aug 19
Seven Key Words That Explain "Stupidly High" Bond Market Prices - 23rd Aug 19
Is the Fed Too Late Prevent A US Housing Bear Market? - 23rd Aug 19
Manchester Airport FREE Drop Off Area Service at JetParks 1 - Video - 23rd Aug 19
Gold Price Trend Validation - 22nd Aug 19
Economist Lays Out the Next Step to Wonderland for the Fed - 22nd Aug 19
GCSE Exam Results Day Shock! How to Get 9 A*'s Grade 9's in England and Maths - 22nd Aug 19
KEY WEEK FOR US MARKETS, GOLD, AND OIL - Audio Analysis - 22nd Aug 19
USD/JPY, USD/CHF, GBP/USD Currency Pairs to Watch Prior to FOMC Minutes and Jackson Hole - 22nd Aug 19
Fed Too Late To Prevent US Real Estate Market Crash? - 22nd Aug 19
Retail Sector Isn’t Dead. It’s Growing and Pays 6%+ Dividends - 22nd Aug 19
FREE Access EWI's Financial Market Forecasting Service - 22nd Aug 19
Benefits of Acrobits Softphone - 22nd Aug 19
How to Protect Your Site from Bots & Spam? - 21st Aug 19
Fed Too Late To Prevent A US Housing Market Crash? - 21st Aug 19
Gold and the Cracks in the U.S., Japan and Germany’s Economic Data - 21st Aug 19
The Gold Rush of 2019 - 21st Aug 19
How to Play Interest Rates in US Real Estate - 21st Aug 19
Stocks Likely to Breakout Instead of Gold - 21st Aug 19
Top 6 Tips to Attract Followers On SoundCloud - 21st Aug 19
Holiday Nightmares - Your Caravan is Missing! - 21st Aug 19
UK House Building and House Prices Trend Forecast - 20th Aug 19
The Next Stock Market Breakdown And The Setup - 20th Aug 19
5 Ways to Save by Using a Mortgage Broker - 20th Aug 19
Is This Time Different? Predictive Power of the Yield Curve and Gold - 19th Aug 19
New Dawn for the iGaming Industry in the United States - 19th Aug 19
Gold Set to Correct but Internals Remain Bullish - 19th Aug 19
Stock Market Correction Continues - 19th Aug 19
The Number One Gold Stock Of 2019 - 19th Aug 19
The State of the Financial Union - 18th Aug 19
The Nuts and Bolts: Yield Inversion Says Recession is Coming But it May take 24 months - 18th Aug 19
Markets August 19 Turn Date is Tomorrow – Are You Ready? - 18th Aug 19
JOHNSON AND JOHNSON - JNJ for Life Extension Pharma Stocks Investing - 17th Aug 19
Negative Bond Market Yields Tell A Story Of Shifting Economic Stock Market Leadership - 17th Aug 19
Is Stock Market About to Crash? Three Charts That Suggest It’s Possible - 17th Aug 19
It’s Time For Colombia To Dump The Peso - 17th Aug 19
Gold & Silver Stand Strong amid Stock Volatility & Falling Rates - 16th Aug 19
Gold Mining Stocks Q2’19 Fundamentals - 16th Aug 19
Silver, Transports, and Dow Jones Index At Targets – What Direct Next? - 16th Aug 19
When the US Bond Market Bubble Blows Up! - 16th Aug 19
Dark days are closing in on Apple - 16th Aug 19
Precious Metals Gone Wild! Reaching Initial Targets – Now What’s Next - 16th Aug 19
US Government Is Beholden To The Fed; And Vice-Versa - 15th Aug 19
GBP vs USD Forex Pair Swings Into Focus Amid Brexit Chaos - 15th Aug 19
US Negative Interest Rates Go Mainstream - With Some Glaring Omissions - 15th Aug 19
US Stock Market Could Fall 12% to 25% - 15th Aug 19
A Level Exam Results School Live Reaction Shock 2019! - 15th Aug 19
It's Time to Get Serious about Silver - 15th Aug 19
The EagleFX Beginners Guide – Financial Markets - 15th Aug 19

Market Oracle FREE Newsletter

The No 1 Gold Stock for 2019

U.S. Interest Rates, the Fed and Stock Market

Stock-Markets / Stock Markets 2010 Dec 12, 2010 - 05:40 AM GMT

By: Tim_Wood


Best Financial Markets Analysis ArticleOf late it seems that rising interest rates and the Fed’s ability to “keep rates low” have become a focal point for many of the news commentators.   The vast majority of the public believes that the Fed is actually controlling interest rates and as a result that they are controlling the credit markets as well as the equity markets.  I am about to show you the proof that the Fed follows the short-term credit market and that in reality they do not lead.  The data simply does not support the widely held belief that the Fed is in “control” of the markets.    I realize that this may come as a shock to you, but reality is what it is.  The data speaks for itself. 

In the first chart below is the Discount Rate, plotted in the upper window, and the 3-month T-bill rate is plotted in the lower window along with my Trend Indicator.  I realize that you cannot tell it from this chart because given the time period that is covered the details are lost, but the fact is that the 3-month T-bill rate moves first and the Fed simply follows.  Given that this is a well documented fact, with a 60 year history, I am simply amazed by the fact that so many people put so much emphasis on what the Fed does and says in regard to interest rates.  Fact is, the media propaganda machine has conditioned the vast majority of the public that they somehow control rates and as a result control the markets.   If you go to I have posted more detailed charts.  All you have to do is start at the beginning and move forward in time and you will clearly see that the Fed follows the short-term credit market.

The one exception I found was at the February 2010 increase in which the Fed raised rates .25 point prior to my Fed model officially signaling that we had moved into a rate hiking environment.  But, even then my Fed model was telling me that the rate cutting cycle had ended and it was very close to an upturn signaling that we had moved back into a rate hiking cycle.   As we move into 2011, you can clearly see in the chart below that the Trend Indictor has turned up on the 3-month T-bill.  This tells us that we are in the early stages of a rate hiking cycle, which means that the bias for short-term rates is to the upside.  If the Trend Indicator remains positive, rates will begin to rise and if rates begin to rise, the Fed will again be forced to follow.

Now that this fact has been established I want to talk about another myth.  I think you will also agree that the perception is that the Fed saved the market back in 2001 and 2002 with their aggressive rate cuts.  Well, we just established the fact that the Fed follows 3-month T-bill rates.  Fact is, the 3-month T-bill rate fell from 6.22% in November 2000 to 5.70% in December 2000.  It was then at the January 2001 Federal reserve meeting that the Fed made the first cut of the Discount Rate taking it from 7.50% to 7.25%.   Both the stock market and the 3-month T-bill rate continued to fall and the Fed continued to more aggressively cut rates to keep up with the falling T-bill rate.  Now, look at the chart below.    In the upper window of this chart I have again plotted the Discount Rate.  In the lower window I have plotted the S&P 500.  As you can see, the rate cuts did nothing to stop the decline.  From the time the rate cuts began in January 2001 the S&P 500 fell from 1,283 all the way down to its final low at 768. This was a 40% slide in the S&P in spite of the rate cuts.  Fact is, these rate cuts did absolutely nothing to hold the market up and in many cases they made multiple cuts and still the market fell.   This was particularly true from early 2001 into the fall of 2001.  There was a bounce after the 911 bottom, but even the rate cuts following 911 did not prevent the continued decline into the 4-year cycle low in 2002.  I don’t have the data during the 1920’s and 30’s, but I do know that the Fed also cut rates and it did nothing to save the market then either.

As the stock market began clawing its way back up out of the 2002 4-year cycle low, the 3-month T-bill continued to decline into June 2003.  As a result, the Fed continued cutting rates even further as they continued following the 3-month T-bill rate down.    If you go back to the charts posted at you can see that the 3-month T-bill rate bottomed at .82% in June 2003.  From this point rates leveled off and in May 2004 rates began to climb.  In mid-June 2004 the 3-month T-bill rate had advanced to 1.39%.  Then in July 2004 the Fed began to raise rates and continued to do so as they once again followed the T-bill rate higher.  It was not until the 3-month T-bill rate got hit hard in August 2007 that the Fed began cutting rates and for the record, the Trend Indicator turned down in June 2007 telling us that we had entered into another rate cutting cycle.  

Also, for the record, the decline by equities that began in October 2007 was associated with the 4-year cycle top that was stretched due to the liquidity bubble to “fix” everything following the decline into 2002.   We all know how that ended with the decline into the 2009 low and once again as you can see in the chart above, the Fed cut rates all the way down.  Then, the propaganda spread by the media, was once again that they were cutting rates in order to help save the market.  But, if that were the case it obviously did not work any better than it did in association with the decline into the 2002 low.  Fact is, when you look at the charts, the Fed was once again merely following the lead of the 3-month T-bill.    As the 3-month T-bill hit bottom in 2009, the Fed stopped cutting rates.   Of course, the story is that they stopped cutting rates because the equity market hit bottom, which is more propaganda.    Fact is, the rate cuts did nothing to stop the market from falling, which again was the case into the 2002 low, and they stopped cutting rates because the 3-month T-bill found a bottom. 

Now, here we sit with interest rates rising.  My subscribers have known about the structural issue with bonds that set the stage for this round of rising rates for months.    I reported at the close of 2009 that we were entering into an environment of rising rates.   It was then in February 2010 that the Fed made a proactive rate increase as my Fed model was bottoming.  This model has now been positive since March and if something doesn’t change, this model is telling us that the propensity is still toward higher rates as we move into 2011.  The question now on the news is, what will rising rates do to the equity markets?   

If we push the mainstream opinion to the side and look at the historical facts, we find that there are times in which equities have advanced in conjunction with rising rates and there are times in which equities have declined in conjunction with rising rates.  To say that rising rates are automatically good or bad for equities is putting the cart before the horse.    A complete study of the correlation between interest rates and equity price is outside of the scope of this article, but to give you just a couple of examples, during the 1966 to 1968 bear market rally, interest rates rose.   During the 1970 to 1973 bear market rally interest rates declined.  During the 1973 to 1974 meltdown by equities into their final bear market bottom, interest rates rose.   During the 1982 to early 1994 bull market in equities, interest rates declined, but then from mid-1994 into 2000 they rose.    Between 2004 and 2007 equities advanced as rates again rose and the recent advance seen by equities out of the 2009 low has occurred with interest rates basically flat.

So, the fact that we are now in a rate hiking cycle and interest rates are beginning to move up no doubt begs the question as to whether this will be good or bad for equities.  But, my take is rather than to draw an erroneous conclusion, we should look at the markets independently.   Until my Fed model changes, I know that the bias for rates is to the upside.  As for equities, I have identified a common cyclical DNA Marker/trait that has occurred at every major top since 1896.  Thus, it is my opinion that the answer to the question with interest rates and the market lies in simply taking the markets independently of one another and to implement the tools that we have and in doing so these tools will tell us.

I have begun doing free market commentary that is available at   The specifics on Dow theory, my statistics, model expectations, and timing are available through a subscription to Cycles News & Views and the short-term updates.  I have gone back to the inception of the Dow Jones Industrial Average in 1896 and identified the common traits associated with all major market tops.  Thus, I know with a high degree of probability what this bear market rally top will look like and how to identify it.  These details are covered in the monthly research letters as it unfolds.   I also provide important turn point analysis using the unique Cycle Turn Indicator on the stock market, the dollar, bonds, gold, silver, oil, gasoline, the XAU and more.   A subscription includes access to the monthly issues of Cycles News & Views covering the Dow theory, and very detailed statistical based analysis plus updates 3 times a week.

By Tim Wood

© 2010 Cycles News & Views; All Rights Reserved
Tim Wood specialises in Dow Theory and Cycles Analysis - Should you be interested in analysis that provides intermediate-term turn points utilizing the Cycle Turn Indicator as well as coverage on the Dow theory, other price quantification methods and all the statistical data surrounding the 4-year cycle, then please visit for more details. A subscription includes access to the monthly issues of Cycles News & Views covering the stock market, the dollar, bonds and gold. I also cover other areas of interest at important turn points such as gasoline, oil, silver, the XAU and recently I have even covered corn. I also provide updates 3 times a week plus additional weekend updates on the Cycle Turn Indicator on most all areas of concern. I also give specific expectations for turn points of the short, intermediate and longer-term cycles based on historical quantification.

Tim Wood Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules