Is an Accommodating Fed Really Bullish for Stocks?

Many bulls seem to think that all the equity market needs to keep moving higher (following the sharp correction that took place in recent months) is an accommodative Federal Reserve.

Based on the following graph, which charts the relationship between the central bank's fed funds target rate and the S&P 500 index over the past few years, they might want to reconsider (of course, this may just be a coincidence, right?)

click to enlarge

Comments

[Dana Cole]

Interesting, but aren't there other ways to read this chart? Isn't it also saying that after the Fed lowered rates in 2000 and 2001, a huge rally followed? Then, as the rally progressed, they felt the need to raise the rates again to keep inflation down.
Since they are lowering rates much more aggressively now than they did back then, the chance for an even bigger rally - or at least a near-term sideways range - is there.

[BrucePile]

This market downturn is hard to analyze via the usual sentiment/Fed rate stuff. I don't see why one should try to identify a bear market with the "how do you feel about that" analyst's couch approach (bull/bear surveys and what not). A bull/bear transition is simply a major change in trend and thus lends itself to technical analysis very well. We have reliable things like the Dow Theory and a simple chart comparison between the Nasdaq of '99-'01 and the S&P 500 now that all agree and indicate the start of a bear. To compare the last bull/bear transition to now, you must swap tech for retail. Tech led the last bull and was the first to turn down. It was many, many months later that the broader market did the turn to bear. Eventually nearly everything got hit. In the current bull, the housing boom and retail led and housing rolled over in mid '05, then retail in mid '07. Now the broad market is following this lead with the metals being the last to be derailed (even Agri may have its turn on the chopping block). You don't get this kind of slow cascading of theme groups in a quick profit-taking bull market correction, where everything gets hit in a brief 3 month or less blitz and then they're all off to the races again. This is a transition not a correction. And the theme of this bull and bear is fiat money - debt "instruments"... where money is created out of thin air and stacked into a house of cards. Now with a puff of wind the cards are tumbling and I'm not sure how much good the Fed, the governments, or anyone can do throwing more fiat money at it.

[BrucePile]

This market downturn is hard to analyze by the usual sentiment/Fed stuff. I don't see why one should try to identify a bear market with a "how do you feel about that" analyst's couch approach. A bull/bear transition is simply a major change in trend and thus lends itself to technical analysis very well (which in an efficient market accounts for the feelings, the Fed, and a bunch of things you have failed to consider). We have reliable things like the Dow Theory and a simple A/D chart comparison between Nasdaq '99-'01 and the S&P 500 now that agree that we are starting a bear. To compare the last bull/bear transition to now, you must swap tech for retail. Tech led the last bull and was the first thing to breakdown technically into a bear trend. It was many, many months later that the broad market made the bear turn. Eventually nearly everything got clobbered with collateral damage far away from the transition's them. The current bull was led by the housing boom and the retailers. Housing rolled over in mid '05 and retail in early '07. Now the broader market is following this lead with the transports and metals being the last to be derailed (even agri may get it's turn on the chopping block). You don't get this kind of slow cascading of theme groups in a quick profit-taking bull market correction, where everything gets hit in a brief 3 month or less blitz and then they're all off to the races again. This is a transition, not a correction. And the theme of this transition is play money - global debt instruments created out of thin air and stacked into a house of cards. Now with a puff of air the cards are tumbling and I'm not sure how much good the Fed, the governments, or anyone can do by throwing more play money at it.

[thebage]

Is 5 years and two tightening cycles really enough time to say anything about the relationship?