12/14/25
S&P 500: 6827
Nasdaq: 23,195
10 Year Treasury: 4.1%
David R. Snyder, CFA
One of the biggest changes in correlations in the stock market occurred in January 2001 and it went unnoticed. From the early 1950’s when the Fed became more active with monetary policy, until January of 2001, the stock market followed certain patterns and was relatively easy to forecast. Whenever the Fed was lowering rates the stock market rose. The stock market continued to rise when the Fed would raise rates until the yield curve (3 month to 10 year Treasury bond rates) became inverted. Then within 13 months the stock market would enter a bear market (in the 1956-57 bear market only the 1 and 2 year vs. 10 year Treasury inverted). It was easier to forecast bull markets as the stock market would advance within three months after the first Fed rate cut after a series of Fed rate hikes and continue until the yield curve inverted. In 2000 the yield curve inverted three months after the bear market began, a little late but still saved a lot of the decline if sold when it inverted. The only exceptions were the 1962 bear market caused by the highest historical ever valuations at that time, and the stock market crash of 1987, which wasn’t preceded by an inverted yield curve. However, in 1987 the 10 year Treasury yield rose to 10% with a P/E of 17, an extreme event and easy to forecast a resulting bear market (not the crash but the bear market).
That playbook completely changed in January of 2001. The Fed lowered the Fed funds rate twice by 50 basis points each in January after a long series of hikes, causing the stock market to advance strongly. But by February the stock market resumed its bear market. The Fed then lowered the Fed funds rate 12 times over the next 22 months but the S&P 500 declined 42% during that period. In September of 2007 the Fed cut the Fed funds rate by 50 basis points after a multi-year series of Fed rate hikes. They cut rates 10 more times to 0% over the following 15 months and the S&P 500 declined 49% until March of 2009. The problem for the future is that instead of the stock market immediately responding positively to lower interest rates as occurred before 2001, there now is a threshold that must be met with rate cuts and we don’t know what that number will be in the future. This has been caused by a significant decline in the velocity of money, falling from a peak of 2.2 in 1998 to the current level of 1.2. Don’t fight the Fed is no longer a foolproof strategy. A much more difficult stock market to forecast.
Full Disclosure: I own several of the securities mentioned positively. None have been purchased within the last month. The opinions merely represent the opinion of the author as CIO of Journey 1 Advisors, LLC and intended to inform the readers about our investment philosophy and strategy. The contents of this report are based on sources believed to be reliable. It is not intended for circulation. It is not intended to offer investment advice, or to recommend the purchase or sale of any securities or investment product. Investment advice is only given after a client has signed an investment advisory agreement with Journey 1 Advisors, LLC and will be subject to the terms and conditions therein. Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stock’s expected performance and risk.