About stock market valuations and interest rates HQuotes.com

I strongly believe that the charts often speak themselves, you
just need to look at them from the right angle and at the right moment
- JB90

	Market commentary by JB90
09/05/2001	About valuations and interest rates
	Since 1913 when the Fed was established, there were 21 easing cycles when Fed was lowering interest rates for more than two consecutive times to stimulate the economy. We know that Fed has big power on the stock markets as in 17 of 21 cases the market bottom was achieved shortly after the first interest rate reduction, in 3 cases the bottom was hit shortly after the second cut. And the only exception when Fed was unable to persuade the markets with interest rate cuts was 1929. Interestingly, there were exactly six rate hikes just before the market crashed in 1929. The same number of rate increases we had in 1999-2000 tightening cycle when Fed was trying to slow down the roaring New Economy when CSCO had the highest capitalization in the world and Yahoo’s capitalization was more than the entire steel industry plus GM, Ford and Chrysler taken together. The Japanese economy is currently struggling in its 4th recession since 1990 mania despite the fact that the discount rate for japanese national currency is almost zero! The similarity between these three charts is amazing. When I make a simple calculation that Nikkei-225 fell from ~40K to current 10K and apply this 4:1 ratio to Nasdaq's peak of 5130, I get roughly 1300 for Nasdaq Composite down target. Fundamentally, low interest rates make stock investments more attractive, while falling Earnings do the opposite. We updated our S&P 500 valuation chart presented on 03/16/2001 and here we see that we steadily approach a support target of ~0.75 for a multiple of P/E and Fed Funds Yield. At this time we're still overpriced somewhat about 25%. This gives us a down target of ~ 900 which coincides with the previous estimation for a possible bottom. The historical ratio between Nasdaq Composite and S&P 500 has an average value of ~ 1.5 (excluding Great Bubble period). If we multiply the down target for S&P by 1.5 the result will be ~1350 which is the down target for Nasdaq Composite Good luck, JB90

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