When valuing an asset, one assesses the present value of the future returns that asset will bring.  The present value, PV, of a future cash flow, C, is calculated using the number of years in the future that the flow will be received, t, and the interest rate, i. Specifically, PV= C/(1+i)^t.  The important thing to note from this equation is that the interest rate i is in the denominator of the equation— as it rises, the value, PV, falls.  To say it another way, lower interest rates generally mean higher values of current assets and thus, higher stock prices.  Thus, high interest rates portend lower stock prices.

With this in mind, keeping interest rates low should bolster stock prices.  Jim Hardesty has prognosticated that interest rates will remain low, and we will see no major changes in the Fed’s strategy in the next 18 months.

The  importance of the upcoming earnings announcements cannot be underestimated.  As we enter the earnings-reporting season, we are confident that the numbers released by many companies will be stronger than anticipated.  This development will be a sure sign that we are well on our way to an economic recovery.