The Fed Funds Rate and the SP500

Dec 15, 2015: 11:07 AM CST

How have stocks performed over the last 15 years in environments of both rising AND falling interest rates?

It’s a critically important question to ask as the Fed prepares to raise interest rates for the first time in 9 years.

Let’s quickly chart the Fed Funds Rate and the S&P 500 together – you’re in for a surprise:

You’ve probably heard “higher interest rates are bad for stocks and lower interest rates are good for stocks.”

In general, that’s true logically but that’s not at all what the chart above reveals about the last 15 years.

The black line is the Fed Funds Rate (in percentages – scaled on the left) overlaid with the S&P 500.

I highlighted two green periods where the Fed Funds Rate rose along with a bullish stock market.

I also noted the two red periods where the Fed Funds Rate fell in alignment with the two bear markets.

It’s absolutely true that a 0% Fed Funds Rate boosted the economy and the stock market from 2009 to present.

Also, the Fed printed money via three rounds of Quantitative Easing during the 0% rate lock period.

Nevertheless, as we prepare ourselves for the rate hike this week, don’t fall victim to the knee-jerk reaction that “higher rates means I must sell stocks.”

The last 15 years show that stocks can and do rise during periods of increasingly higher interest rates.

After all, the Fed hikes rates when it is confident the growing economy is able to withstand the increased borrowing costs.

It lowers them when it wants to provide stimulus to a faltering or weakening economy.

Look behind the headlines to charts like this and adjust accordingly.

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Corey Rosenbloom, CMT
Afraid to Trade.com

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One Response to “The Fed Funds Rate and the SP500”

  1. Tuesday links: practicality and flexibility | Stock Market News Says:

    […] The relationship between the Fed Funds rate and the stock market this century (blog.afraidtotrade.com) […]