Figure 13-2: Rising discount/fed funds rates: A harbinger of bear markets
Figure 8-4 showed that bear markets typically begin when the year-over-year rate of growth in consumer spending (black line) peaks and begins to fall. As shown in the shaded ovals, rising interest rates (green line, inverted, right scale), because they have been effective leading indicators of consumer-spending slowdowns, also are an effective indicator of approaching bear markets (vertical yellow bars).
Current Comment: The sharp increase in the Fed Funds Rate from 2004 through mid 2005 (remember: declining given its inverted scale in this chart) did not produce a bear market, a significant anomaly vis-à-vis prior cycles in this chart. Year-over-year Fed Funds Rate comparisons have now turned positive which should signal a favorable stock-market environment (if an offsetting anomaly does not occur!).
