July 03, 2000

The forecast for the next two quarters suggests that large-cap will outperform the small-cap and mid-cap stocks. In turn, mid-cap stocks are expected to outperform small-caps. The data points to an end of the small cap market. Since we believe that small-caps are nothing more than tax shelters, inflation hedges and regulatory skirts, it is not surprising to us that the Fed's attempts to slowdown the economy led to a surge in the small-cap performance during the first half of the year. Our model correctly anticipated this surge. Looking forward, as the economy slows, hopefully Greenspan will unwind his Phillips curve strategy and return to the price rule. That should reverse the relative performance between large and small-caps.

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