Stock market timing with interest rates by Jay Kaeppel
The level and trend of interest rates has a tremendous influence over what types of investments investors choose to put their money into. Generally, when interest rates are low and/or falling, investors will move into the stock market, pushing prices higher. Conversely, when interest rates are high and/or rising, investors will move out of stocks, thus pushing prices lower.
By tracking interest rates, investors can often identify periods when the probability of higher stock prices is great. The key is knowing which interest rates to watch and which trends signal a high probability that prices will move. A simple indicator is the Treasury bill/discount rate ratio (TB/DR), which measures the relationship between two key interest rates. Over the past 35 years, the stock market has moved higher 90% of the time when this indicator has been bullish.
It is generally accepted among market technicians that it is a favorable sign for the stock market when the yield on three-month T-bills falls below the Federal Reserve Board's (Fed) discount rate, and an unfavorable sign for stock prices when T-bill yields rise above the discount rate. After researching this indicator in more detail, I was surprised to find just how useful this measure really is at signaling true bull market conditions.