April 02, 2001

We apply our Selector Methodology to BARRA value and growth indices to estimate the likelihood of value stocks in the S&P 1500 outperforming growth stocks in the S&P 1500 and vice versa. The table below reports the estimated probabilities for the last four quarters, the current quarter and the next three quarters. The forecast for the next four quarters is quite interesting. The model suggest a short term rotation to growth stocks. But notice that at the beginning of the next year the model expects a sharp change in the probabilities. We have looked into the various sub-sectors and the market seems to have a bipolar mind. Large growth and small value are the two sectors with the highest probability of outperforming the benchmark. We interpret the numbers to mean that we are at a clear inflection point. The policy actions taken in the next few weeks will determine the direction of the market as well as the overall economic environment during W's administration. If rates are reduced, the fed returns to a price rule and regulations decline the large cap growth stocks will rule the day. As of today the markets do not seem to be quite sure whether that is the road that we will travel.

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