Observations:
● Stocks have risen 2.4% annually when the discount rate was rising.
● Stocks have risen 8.4% annually when the discount rate was falling.
● Stocks typically rise 3.5 times as fast when the discount rate is falling.
● Current conditions urge caution.
● Stocks have risen 2.4% annually when the discount rate was rising.
● Stocks have risen 8.4% annually when the discount rate was falling.
● Stocks typically rise 3.5 times as fast when the discount rate is falling.
● Current conditions urge caution.
What is the Discount Rate?
The Discount Rate is set by the Federal Reserve. It is the rate at which banks borrow money from a Federal
Reserve Bank. Changes in the discount rate are usually followed by similar changes in the rates of other key
interest rates. It is one of the tools used by the Federal Reserve Bank to influence the economy. The rate may
change often but typically changes direction only once every two to three years. The direction has changed
only thirty seven times since the Federal Reserve Bank was established in 1913. In eighteen of those
periods, the discount rate rose. In nineteen periods, the discount rate fell.
The Discount Rate is set by the Federal Reserve. It is the rate at which banks borrow money from a Federal
Reserve Bank. Changes in the discount rate are usually followed by similar changes in the rates of other key
interest rates. It is one of the tools used by the Federal Reserve Bank to influence the economy. The rate may
change often but typically changes direction only once every two to three years. The direction has changed
only thirty seven times since the Federal Reserve Bank was established in 1913. In eighteen of those
periods, the discount rate rose. In nineteen periods, the discount rate fell.
| Stock Returns and the Discount Rate: 1914 - 2005 |
|
1) If the last change in the discount rate was up, the discount rate is rising. If the last change in
the discount rate was down, the discount rate is falling. 2) Dividends are not included.
the discount rate was down, the discount rate is falling. 2) Dividends are not included.
Summary:
The annual compounded stock return while the discount rate was rising was 2.4%. While the discount rate
was falling, stocks rose 8.4 % / year. That's 3.5 times as fast as when rates are rising. (8.4% / 2.4% = 3.5).
Of the nineteen periods when the discount rate has fallen, only three of them produced a losing period for the
Dow (DJIA). Two of those occurred in the last 6 years. The other occurred in the Great Depression.
The fact that the discount rate is currently rising, combined with the Dow's recent record of losing money
when rates fall, is not encouraging. On the bright side, the market has been climbing and SignalTrend's
computerized timing system is still bullish on stocks. (A Buy signal is still in effect.)
The annual compounded stock return while the discount rate was rising was 2.4%. While the discount rate
was falling, stocks rose 8.4 % / year. That's 3.5 times as fast as when rates are rising. (8.4% / 2.4% = 3.5).
Of the nineteen periods when the discount rate has fallen, only three of them produced a losing period for the
Dow (DJIA). Two of those occurred in the last 6 years. The other occurred in the Great Depression.
The fact that the discount rate is currently rising, combined with the Dow's recent record of losing money
when rates fall, is not encouraging. On the bright side, the market has been climbing and SignalTrend's
computerized timing system is still bullish on stocks. (A Buy signal is still in effect.)
| In the next issue of Investment Tips: This bull market is getting old. History suggests that it is due for a setback. SignalTrend will show you the 104 year record. |
| More: Look below to send us your feedback or to see previous issues of Investment Tips. |
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5/12/06
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| How do I use this information? 1) Consider investing a portion of your funds based on the direction of the discount rate. You might allocate 10% of your liquid funds to this purpose. Invest those funds in stocks when the discount rate is falling. Move them to short term bonds, CDs or money market funds when rates are rising. The direction of the discount rate is currently up (bearish for stocks). 2) Prepare yourself emotionally to change from bullish to bearish positions. The end of bull markets are deceptively full of peace, safety and prosperity. Their beginnings are disguised by confusion, pessimism and outright panic. SignalTrend's unemotional computer timing system may change its buy / sell signal in the near future. If that happens, SignalTrend will send you an email alert. Be sure to check your email on Saturdays. Remember, SignalTrend's stock market timing system was backtested 100 years with excellent results! |
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