The Nasdaq went from 700 to 1050 during 1994 & 1995 when rates were raised. Over the next 4 years, we saw one of the steepest climbs in the stock market ever. http://finance.yahoo.com/q/hp?s=%5EIXIC&a=01&b=5&c=1994&d=00&e=30&f=2000&g=m The Nasdaq followed 1994 Nasdaq at 750 (fed funds rate was raised to from 3% to 6%) 1995 at 1050 (fed funds rate was at 5-6%) 1996 at 1300 (fed funds rate was at 5-6% 1997 at 1600 (fed funds rate was at 5-6%) 1998 at 2100 (fed funds rate was at 5-6%) 1999 at 3900 (fed funds rate was at 5-6%) (a 400% rise while Fed funds rate was at 5-6%)
The Fed only raises rates and keeps them up when it appears the market has potential to rise strongly. I wish they would have even more belief in the strength of the economy and move rates up faster to the 6% level like they did by the beginning of 1995.
This time is somewhat different because earnings of S&P500 companies are going up in double digits (vs. prior year) for 16 quarters straight. That's 16 consecutive quarters with earnings rising > 10% (this is a rare event). Earnings have risen 68%, yet stocks have been stuck in a narrow trading range. The Dow has remained in a +/-8% range for 3 years! The Dow has barely moved since Sept 2003.
Earnings are up 68% and stocks are building up rocket fuel as they have climbed only 10% in this period. The earnings strength continues as the S&P500 companies posted a 14% rises in earnings for Q1 �06, and they showed record earnings, reduced debt, and built record cash levels now > $670B cash (highest ever)! Stocks are a far better value now than at the beginning of 2006. Now the average S&P500 P/E is 13.9 -- this is significantly better than the long-term historical P/E of 15.0 from the past 53 years. Fundamentals are way too good to continue in this +/-8% Dow range forever! The climb in stocks is coming in 2006. We are overdue for at least a 50% climb. This will likely put the Dow over 16,000 near the end of 2006. The Nasdaq would easily exceed 3000.