Heard on the Street: How High Will Low Interest Rates Push Stock Prices?
NEW YORK -- If low interest rates are the stock market's fertilizer, the market has been well fed indeed.</br></br>In the past year, short-term interest rates have fallen to around 5% from above 7%. And the stock market, despite a sluggish economy, has risen to near-record levels.</br></br>The average stock in the Standard & Poor's 500-Stock Index sells for a price/earnings multiple (P/E) of 20 times the past four quarters' earnings, way above the long-term average of 14 or so. The P/E of the Dow Jones Industrial Average is even higher, at 23.</br></br>To bulls, low interest rates and low inflation justify today's high prices. Puny yields on savings accounts and money funds make stocks relatively more attractive. And low rates might spur economic growth -- again pushing stocks higher.</br></br>But how high? While nobody doubts that lower rates help stocks, a look at history suggests that investors may have overdone it.