January 03, 2001

We expected the economy during 2000 to work off the inventory accumulated in anticipation of Y2K. The rise in oil prices and the Fed tightening also contributed to an environment of slower economic growth. The uncertainty surrounding the recent presidential election did not help the market either. All of these variables had a negative effect on stock market valuations. The impact of the downdraft was most pronounced on stocks with longer investment horizons. Thus, it is not surprising to us that value stocks have performed better than forward-looking growth stocks. The good news is the oil price hike seems to be behind us. In the next few weeks Alan Greenspan will have an opportunity to reverse course. A reduction in rates will lengthen investors horizons. Another possible influence on the markets may be the timing of the Bush economic program. A phased-in tax reduction will introduce strong incentives to delay income recognition which will lead to a further slowdown of the U.S. economy and extend the value cycle. In contrast, any tax proposal that includes a retroactive clause will be short-term bullish. The long-term outlook for the economy seems to be a bullish one. Thus the question seems to be, when will the market switch to growth stocks?

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