Fed Model Loses Its Grip on Stocks

Wall Street likes to play up the Federal Reserve's role in boosting the market, but by one popular gauge at least the Fed's influence on stocks seems to be diminished.

The so-called Fed model is supposed to be able to predict when U.S. stocks are a good buy and did a reasonable job for decades. But the gauge, which compares the forward earnings yield -- the inverse of the price-to-earnings ratio -- to the yield on 10-year Treasuries hasn't offered much help recently. The S&P 500's earnings yield rose above the 10-year Treasury in March 2002 and has remained above it ever since. An investor who followed the Fed model would have been walloped during the financial crisis and received little or no warning of more minor market tumbles, like the 2011 euro crisis and the 2015 junk-bond flare-up.