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Dow Jones Industrials Return Rate vs. Fed Funds Rate
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DJIA Return Rate
Simultaneous Change
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DJIA Return Rate
Subsequent Change
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1% Rise in Fed Funds Rate over 1 Year
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1% Decline in Fed Funds Rate over 1 Year
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What does the table mean?
6% for example) has typically been accompanied by a 3.51% Dow Jones Industrials
Return Rate decline during that year and a 0.28% Dow Jones Industrials Return Rate
decline the following year.
It also indicates that a 1% Fed Funds Rate decline over a 12 month period, (from 5%
to 4% for example) has typically been accompanied by a 3.29% Dow Jones Industrials
Return Rate increase during that year and a 0.16% Dow Jones Industrials Return
Rate increase the following year.
The center column shows the change in the Dow Jones Industrials Return Rate over
12 months, depending on whether the period experienced a rising or falling Fed
Funds Rate. The right column shows the change in the Dow Jones Industrials Return
Rate during the year following an increase or decrease in the Fed Funds Rate.
The data history in the middle column shows a strong tendency for the two
rates to move inversely to each other during the same time period.
The evidence for using the previous 12 month change in the Fed Funds Rate
to predict the future direction of the Dow Jones Industrials Return Rate is
weak (right column). That evidence indicates that the direction of the rates
are inversely related to each other. Therefore, a change in the Fed Funds
Rate suggests that the Dow Jones Industrials Return Rate will move in the
opposite direction of the Fed Funds Rate, but only to a limited extent.
Annual rates are shown in the graph and calculations.
How Do I Use This Information?
There are many investment theories that are well publicized in the financial press.
Even though little or no historical data may be offered as evidence for such theories,
many investors use them subconsciously, if not intentionally.
Example Theories: Rising Inflation is bad for the stock market. A booming housing
market is good for the S&P 500 stock index. A falling fed funds rate means that long
term interest rates will fall.
There are many such theories. In this site, long term investment and economic data
is tested against decades to determine whether a relationship actually exists or not.
This historical correlation provides a vital aid in interpreting the often confusing
behavior of the financial markets. The perspective gained may be the difference
between staying the course or being blown and tossed by every investment theory
that is popular at the moment. What the majority assumes to be true, often is not. In
the final analysis, readers are admonished to follow the evidence, wherever it leads.
This page tests the relationship between the Fed Funds Rate and the Dow Jones
Industrials Return Rate. Suppose you are making a business or investment decision.
Suppose again that the decision hinges on whether the Fed Funds Rate and the Dow
Jones Industrials Return Rate tend to move in the same or opposite directions. The
data, graphs, and analysis above will enlighten you. You'll discover whether they
move with, inversely to, or independently of each other.
Suppose that the Fed Funds Rate has risen sharply and that you need to know what
direction the Dow Jones Industrials Return Rate is headed in the near future. Does
the recent increase in the Fed Funds Rate provide a clue about the future direction of
the Dow Jones Industrials Return Rate? The data history, graph, and analysis above
will show you how the Dow Jones Industrials Return Rate has performed after
increases in the Fed Funds Rate. You'll see if one indicator has been likely to signal a
change in another. This is not intended as a prediction, but merely as a clue to the
future from the annals of history. No man knows the future, unless he has the ability
to control the future.
This site compares data series for interest rates, stock indexes, economic indicators,
currency exchange rates and real estate values. Suppose that you want to see how
stock indexes are influenced by interest rates or the value of the dollar. Click one of
the stock index links on the right side of any page. Links to our multi-series graphs
and correlation analysis may be found at the bottom-center of the stock index pages.
Formula for periods with a rising Fed Funds Rate:
1) Change in the Dow Jones Industrials Return Rate DURING periods with a rising
Fed Funds Rate:
The abbreviated formula is: (Dow Jones Industrials Return Rate Change / Fed Funds
Rate Rise) x 1% = Published Rate.
The complete formula is: [(Average change in the Dow Jones Industrials Return Rate
over all rolling 12 month periods with a rising Fed Funds Rate) / (Average Rise in the
Fed Funds Rate over the same 12 month periods)] x 1% = Published Rate.
2) Change in the Dow Jones Industrials Return Rate AFTER a rising Fed Funds Rate:
The abbreviated formula is: (Subsequent Dow Jones Industrials Return Rate Change
/ Fed Funds Rate Rise) x 1% = Published Rate.
The complete formula is: [(Average change in the Dow Jones Industrials Return Rate
during the 12 months following any rolling 12 month base period with a rising Fed
Funds Rate) / (Average Rise in the Fed Funds Rate over the 12 month base
periods)] x 1% = Published Rate.
Formula for periods with a declining Fed Funds Rate:
1) Change in the Dow Jones Industrials Return Rate DURING periods with a declining
Fed Funds Rate:
The abbreviated formula is: (Dow Jones Industrials Return Rate Change / Fed Funds
Rate Decline) x -1% = Published Rate.
The complete formula is: [(Average change in the Dow Jones Industrials Return Rate
over all rolling 12 month periods with a declining Fed Funds Rate) / (Average decline
in the Fed Funds Rate over the same 12 month periods)] x -1% = Published Rate.
2) Change in the Dow Jones Industrials Return Rate AFTER a decreasing Fed Funds
Rate:
The abbreviated formula is: (Subsequent Dow Jones Industrials Return Rate Change
/ Fed Funds Rate Decrease) x -1% = Published Rate.
The complete formula is: [(Average change in the Dow Jones Industrials Return Rate
during the 12 months following any rolling 12 month base period with a declining Fed
Funds Rate) / (Average decline in the Fed Funds Rate over the 12 month base
periods)] x -1% = Published Rate.
Rolling 12 Month Periods Defined:
Overlapping 12 month periods in a monthly data base.
For example:
In the 24 month period included in 2000 - 2001, there are 13 complete rolling 12
month periods. The first is January, 2000 - December, 2000. The second is February,
2000 - January, 2001. The third is March, 2000 - February, 2001 and so on. The last
complete rolling 12 month period in the 2000 - 2001 period is January, 2001 -
December, 2001.
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