Asia Stocks Index
Asia Stocks Index
Where is S&p500 Index Heading To?
For the past 8 years Fed interest rate has been a good indicator of S&P500 Index. If you look at the chart below, Fed interest rate has a positive correlation with S&P500 Index. Does this look strange to you?
In finance and economics textbook we often learn that when interest rate rises, this is going to slow down the economy, and when interest rate falls, this is going to be good for the economy. So if the textbook theory is correct, then stock index should fall when interest rate is cut; and stock index should rise when interest rate is raised. But why is the chart not representing this?
Let me tell you, textbook theory often are not realistic and cannot be applied in real life environment. In my view Fed rate is the mother of all US economic data.
When FOMC decides to rise interest rate, this is often a sign that the economy is doing well. When FOMC cuts interest rate, often this is a sign that the US economy needs a booster or a rescue.
So if Fed rate is an indicator of S&P500, there is a lot of downside potential for this index. I hope this is not the case.
The only positive sign is that the Fed has stopped cutting interest rate indicating that the damaging stage of US economy could be bottoming soon.
See here for the chart: http://basemetal-trading.blogspot.com/2008/07/where-is-s-index-heading-to.html
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