What’s Driving the Markets this Year? 

The Fed, The US Dollar, or Bonds?

by Sid Norris of Elliott Wave Plus

What’s been driving the markets this year? If your market research consists primarily of watching financial television channels, you’d swear that the Fed must be controlling all market movements like it was a puppet master!  The vast majority of TV pundits will answer questions about where the market is going next with at least some mention of the Fed.  Let’s look at all the Fed’s rate changes so far this year to see if they are producing consistent buy or sell signals for investors and traders:

(click on images to enlarge)

As you can clearly see, the market has been responding to Fed rate-change days in random fashion.  Sometimes the market reacts to the upside, sometimes to the downside, and sometimes there appears to be no reaction at all.


What about Bonds, then?

So, if the Fed rate changes are not a consistent driver of the stock market what is?  Let’s look now to see if Bonds and the stock market have been more closely correlated this year:

What's driving the markets? 2022 Fed Rate Changes - ES futures

Obviously, the Bond market and the stock market have been highly correlated this year.  It appears that if the stock market is going to reverse course to the upside, bonds will need to stop going down.  Also notice that bonds and the stock market were well underway to the downside when the Fed started raising rates on March 16, 2022, for the first time since they moved to a zero-rate policy on March 19, 2020.  In fact, bonds topped way back in early March 2020.  This proves that the Fed was not the “cause” of the downward movement in the stock market starting from the Jan 4, 2022, all-time high.  The Fed has simply been adjusting its rates to chase the trend of the bond market as they always do, in lagging fashion.


How about the US Dollar?  Has it been driving the markets?

What's driving the markets? 2022 Fed Rate Changes

As you can see, as the US Dollar (shown inverted on the chart) has moved up this year, the stock market has gone down, and in a highly correlated fashion, especially in recent days. Notice that over the last five days or so, the stock market has shown a bit of a bounce, and so has the US Dollar. Bonds on the other hand have continued a bit lower over the last few days.



What’s driving the markets this year? It is first and foremost the US Dollar, followed closely by Bonds.  The stock market clearly needs the Dollar to top, and bonds to bottom if it’s going to put together a sustained rally here.  Also, it appears that the stock market, at least over the last few days, is more closely tied to the inverted US Dollar than it is to bonds.  In other words, if the stock market is going to continue the upside bounce that started Oct 13, it mostly needs the dollar, which peaked back on Sept 28 to break lower.


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