Adding Up the Fed Model's Flawed Math

Analysts who track the so-called Fed model, a valuation tool comparing corporate earnings with interest rates, say that now is a good time buy stocks. Should you believe them?

While it's certainly possible that stocks could rise over the next few weeks or months, relying on the Fed model for clues about the market's direction is probably unwise. After all, the model says nothing about absolute expected stock returns, and it has been a poor predictor of the stock market over long periods of time.

"There is no logical basis for the model, nor was there ever a logical basis," said Larry Swedroe, director of research at Buckingham Asset Management in St. Louis and author of What Wall Street Doesn't Want You to Know. ...