As interest rates fall, stocks tend to rise because as rates fall, the expected no-risk return on your investment from a bonds goes down and investing in stocks looks more attractive.
(If you can only get 3% on your money with a bond, the stock market looks good. If you can get 8%,the stock market doesn’t look as good).
Thus, as we head into a recession, we get bad news about the economy and the stock market responds positively to that news because it suggests the feds will lower rates.
I think the news of the economy slowing drives up stocks in the short term, then, as the economy starts crapping out and earnings reports suffer, the stock market comes down with the economy. I think the Christmas season will really let us know if we are going into recession early 2007 or early 2008.
