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I use my Monetary Model to gauge the influence of interest rates on the stock market. The model combines the rate on 3 month Treasury bills with the rate on the 30 year Treasury bond.  The stock market reacts to changes in these rates over several months. To capture this I compare the rates from the most recent week to the average for the previous 52 weeks.  For example, the model is assigned a neutral rating of 50 if this week's rate is 6.0% and the average for the last 52 weeks is also 6.0%.  Since the stock market has a long-term tendancy to rise, a neutral rating correlates with a slowly rising market.  Falling rates drive stocks higher while rising rates act like a brake on the market's upward momentum. I have summarized about two years' of data since the last buy signal in 1995. The third column is the accumulated advance in the S&P 500 index, whose weekly values are given in the last column.

If you scan down the first two columns, Monetary Model and accumulated gain in the S&P500, you will notice that the model forecasts a rising market but it does not give any clue about how much stocks will rise.  Also you will see short time periods where the model does not work such as April-May 1996 when the model fell but the market rose sharply. The opposite situation occurred in October 1997 when the market fell but the model was unchanged at a pretty high level. The model can predict the direction of the market, but only over several months. I watch for dramatic changes in direction and react accordingly.

Robert Porter

Excel Graph of Monetary Model

Date MonModel Accumulated S&P 500 Since Last Buy/Sell Signal

 

 3Mo T Bill Yield Average (One year) 3MoTreasury Bill Yield 30Yr T Bond Yield Average 30Yr Treasury Bond Year S&P500
11/17/00 47 5 6.18 5.73 5.79 6.03 1368
12/15/00 61 Buy -4 5.89 5.81 5.49 5.98 1312
1/12/01 74 -4 5.18 5.82 5.63 5.9 1318
2/16/01 80 -5 4.93 5.78 5.45 5.81 1301
3/16/01 91 -16 4.47 5.70 5.3 5.75 1151
4/13/01 95 -13 3.9 5.58 5.59 5.72 1184
5/18/01 92 -6 3.54 5.38 5.83 5.69 1292
6/22/01 92 -11 3.42 5.17 5.49 5.49 1124
7/20/01 90 -12 3.49 4.99 5.55 5.65 1211
8/24/01 91 -14 3.33 4.74 5.44 5.62 1185
9/21/01 112 -30 2.3 4.5 5.55 5.6 966
10/26/01 116 -19 2.13 4.13 5.32 5.56 1105
11/23/01 116 -16 1.91 3.8 5.32 5.5 1150
12/21/01 115 -18 1.68 3.48 5.49 5.49 1124
1/18/02 118 -18 1.58 3.2 4.92 5.01 1128
2/15/02 105 -19 1.72 2.95 4.94 5.0 1104
3/15/02 86 -15 1.81 2.72 5.34 5.01 1166
Date MonModel Accumulated S&P 500 Since Last Buy/Sell Signal

 

 3Mo T Bill Yield Average (One year) 3MoTreasury Bill Yield 10Yr T Bond Yield Average 10Yr Treasury Bond Year S&P500
4/19/02 87 -18 1.69 2.5 5.21 5.03 1125
5/17/02 86 -19 1.74 2.35 5 5 1107
6/14/02 80 -26 1.71 2.21 4.97 4.97 1007
7/19/02 79 -38 1.69 2.04 4.68 4.93 848
8/16/02 88 -32 1.61 1.9 4.18 4.88 929
9/13/02 78 -35 1.69 1.78 4 4.82 890
10/18/02 71 -35 1.64 1.72 4.11 4.74 884
11/15/02 104 -34 1.2 1.68 3.94 4.7 910
12/13/02 98 -35 1.19 1.63 4.04 4.63 889
1/17/03 94 -34 1.17 1.59 4.1 4.53 902
2/14/03 95 -39 1.16 1.54 3.95 4.45 835
3/14/03 104 -39 1.09 1.5 3.65 4.34 833
4/18/03 82 -35 1.16 1.44 3.99 4.22 894
5/16/03 95 -31 1.04 1.39 3.56 4.13 944
6/13/03 107 -28 1.04 1.34 3.2 4 989
7/18/03 84 -27 .89 1.26 3.93 3.89 993
8/15/03 57 -28 .94 1.2 4.49 3.89 991
9/12/03 59 -26 .94 1.15 4.34 3.93 1019
10/17/03 52 -24 .93 1.09 4.42 3.96 1039
11/14/03 50 -23 .93 1.05 4.36 3.99 1050
12/12/03 53 -22 .9 1.03 4.29 4 1074
1/16/04 63 -17 .87 1 4.04 4.2 1140
2/13/04 56 -16 .92 .98 4.08 4.03 1146
3/12/04 64 -18 .94 .96 3.75 4.05 1121
4/16/04 43 -17 .93 .94 4.36 4.05 1135
5/14/04 17 SELL 0 1.02 .94 4.81 4.13 1096