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?)
There is an important difference though - the S&P 500 is not as overvalued now as it was then, measured by P/E ratios. It doesn't have as far to fall this time.
Posted by: Doug | February 14, 2008 at 10:40 AM
The reason P/E ratios look reasonable now is because the analysts have still not reduced their estimates of H2 2008 earnings.
Once these estimates are reduced to reflect emerging scenario, S&P will look overvalued and will be repriced quickly.
Posted by: Shankar Khadye | February 14, 2008 at 11:59 AM
That's true, but the fall probably won't be as great. Stocks have already dropped in anticipation of the downgrades you refer to.
Posted by: Doug | February 14, 2008 at 08:38 PM
Just to be the devil's advocate, while the correlation between the two graphs is obvious, the reason for this might be different than the one you suggest.
Maybe the S&P index doesn't react to the Fed cuts, but the Fed Reserve reacts to the market and plays with the rate accordingly.
Isn't that what they're supposed to do in the first place?
Regards, George
Posted by: geegel | February 15, 2008 at 07:00 AM