If the visions of some analysts prove correct, Wall Street's new love affair with falling interest rates may be more than just a passing fling.
The recession is generally cited as the No. 1 reason why the cost of money has been coming down, with the explicit encouragement of the Federal Reserve Board.Such cyclical declines in interest rates are typical of business slumps, given weak demand for loans. They tend to lose their impetus when things get better.
But some optimistic observers see longer-term forces at work that they contend could be favorable for interest rates beyond the next swing of the economic pendulum.
For one thing, they say, the outlook for inflation - an important determinant of interest rates - seems brighter than it has been in quite some time.
On top of that, they argue that enthusiasm for borrowing in this country may remain subdued for some time, in the aftermath of the nation's "leverage binge" in the 1980s.
"The escalating use of debt shaped the 1980s, and a turn away from debt will shape the 1990s," maintains Greg Smith at Prudential-Bache Securities.
He said that if reduced borrowing translates into lower world economic growth in the 1990s, "lower inflation and lower interest rates are quite likely results."
Robert Barbera, economy-watcher at Shearson Lehman Brothers, contends that the "disinflation" that began in the 1980s is headed into a new phase.
"Today's recession will take inflation down to levels not seen since the early 1960s," he says.
"During the 1980s, inflation expectations took longer to squelch and, as a consequence, interest rates remained extraordinarily higher than inflation justified.
"We are now on the threshold of a drop in U.S. interest rates that will reflect both the unfolding slide in U.S. inflation and the shrinking of real (inflation-adjusted) rates."
If that sort of thing happens, stock fans see some juicy possibilities for their market. A lasting decline in interest rates would dampen the appeal of short-term money market investments, which have been formidable competition for stocks over the past couple of decades.
"To maintain their accustomed nominal rates of return," says Smith, "individuals will have to consider alternative investments."
In theory at least, that could translate into a willingness among investors to pay substantially higher prices for stocks, even if corporate earnings growth was only moderate.
But many observers see big obstacles on the path to the end of that rainbow.
"The cyclical trend of interest rates has been downward as the U.S. economy moved into recession," said Richard Hoey at Barclays de Zoete Wedd Inc. "Some further decline is likely before the cycle runs its course. But caveats need to be raised."
For one thing, he said, recent measures of bond-market sentiment have shown almost unanimous bullishness on the interest-rate outlook.
"Such a violent sentiment extreme is not often validated by the near-term behavior of any market, irrespective of the longer-term trend," he notes.
Hoey also cautions that international political and economic forces, whether from the Middle East or elsewhere, could disrupt all interest-rate expectations.
"Any potential for much larger declines in U.S. long-term rates," he says, "rests on the possibility of larger declines in the world structure of long-term rates."