How to invest in a falling-rate environment
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Jeff Layman: In his own words

Jeff Layman is director of investment services at BKD Wealth Advisors in Springfield, Mo.

Effectively we've been in a declining-rate environment in terms of market rates even (before the Fed cut the federal funds rate). Bond market yields have come down to reflect the anticipation that the Fed will be busy.

That, in our view, makes stocks more attractive on a relative basis than the yields available on bonds. We feel that the starting point for stocks is pretty attractive at a little over 15 times this year's earnings estimate. The Fed rate cut should help this along. Stocks benefit in multiple ways from a lower interest-rate environment, so we think stocks, generally, will look even more attractive than they do right now.

With interest rates and inflation even at current levels, a 15 multiple is pretty cheap. Fifteen times earnings or 16 times earnings is generally where we've been trading for the last few months. We feel like a federal funds rate cut would increase the chance we might get a little multiple expansion between now and the end of the year. We're not talking about up to 20 times earnings, but even to 17 or 18 times earnings if there was enough optimism about how those rate cuts might improve the outlook for 2008. And that would really give a nice boost to the total return for equities this year.

What's a stock worth today?
The other thing that's very important with lower interest rates is looking at the valuation of equities and what they're worth today; that present value of their future earnings stream is an important thing to look at. That becomes a bigger number the lower interest rates go. In other words, the future earnings are worth more today in a lower interest-rate environment than they are in a higher interest-rate environment.

Obviously, lower interest rates lower the cost to borrow for corporations, which, all things being equal, ought to help their earnings potential as well. And as important, the thing that's been very concerning to the market over the last several months is: How will consumers do in this environment? Will they stay engaged in the economy? They drive two-thirds of the spending. It's been a little spotty but, generally, they've hung in there pretty well, but the consumer's been a big concern to investors. To the extent that the cost of borrowing comes down and also the availability of credit -- that's the other thing we've been keeping an eye on -- the extent that credit is available and reasonably priced and helps them stay engaged in the economy that would be a positive as well.

Dividends may pay off
Dividends are nice, but we don't really look at them as the end all as far as attractiveness. But if you could find good-quality companies that pay nice dividends -- the financial stocks are pretty good examples of that right now, in that they've been beaten up a bit right now irrespective of the amount of subprime mortgage exposure they have. You can find banks that, in some cases, are in the range of nine or 10 times earnings with dividend yields of 3 percent or greater. We think that looks like a pretty good investment opportunity over the next few years, knowing that there's going to be more negative news about subprime for some time.