NEW YORK (TheStreet) -- Stocks continue to flirt with record highs but the markets aren't expensive, given the current low interest rates, said Kevin Kelly, chief investment officer at Recon Capital Partners.
"Stocks are trading above their historical averages," he said, but "those averages were in in 6% to 8% interest rate environments. Earnings now are worth more and can trade at a premium."
He added that short-term interest rates have been set close to zero for over six years, in an effort to spur economic growth after the 2008 recession. But these rates may have been too low for too long. As the economy recovers, the Federal Reserve is looking for a window to hike rates, which many economists agree will be during the central bank's September meeting.
Low rates have helped propel stocks higher, by not only boosting corporate earnings amid cheap borrowing costs, but also lowering the rates of return on alternative investments, making stocks a more attractive option for investors.While higher interest rates, in theory, would push stocks lower, the Fed's first rate hike will be gradual, central bank officials have insisted.
Wharton University Professor Jeremy Siegel told CNBC that the fourth quarter could be the best time of the year for stocks, if the Fed pushes rates up in September, as investors come to realize that a small rate hike isn't such a threat to the markets.
"At the end of 2016 short-term interest rates on a futures basis, are pegged at less than one percent, so interest rates are going to be low until at least the end of 2016," Kelly said. "We also have an election, so it's a great time to get into sectors like technology and health care."
Kelly is looking at InterContinental Hotels Group (IHG), which he said would be the best name for competitor Starwood Hotels Worldwide (HOT) to acquire, as the company's recent move to hire strategic advisers has sparked merger speculation. He also is looking at British semiconductor company Arm Holdings (ARMH). "Profits grew 22% and its customers include Nvidia (NVDA) and Qualcomm (QCOM)," he added.