Fed Model

The Fed model isn’t like a formal official Thing, and today is being disputed, but it’s been in use for a long time. The Fed model is a tool for measuring whether the market is currently bullish (on the up and up) or bearish (taking a tumble down the hill).

The Fed model compares the earnings of the S&P 500 with the yield of 10-year U.S. Treasury bonds. If the S&P 500 has higher earnings than the 10-year US Treasury bonds, then the sign is market bullish. The reverse...if 10-year U.S. Treasury bond are doing better than the S&P...the market sign is bearish. But it's like reading the entrails of Puxatowny Phil and trying to divine whether snow melts come early or late.

This basic model has been used for decades, but is now being questioned, since it failed to predict the Great Recession that started in 2007 and the euro crisis and junk bond bust in 2015.