June 29, 2000

The expected rise in yield at the long end of the curve is consistent with a 25 basis points Fed hike sometime during the next quarter. If as we believe the economys real GDP growth rate continues slowing down to the three percent range, the implicit market forecast for the fixed income instruments may prove to be too bearish. The same cannot be said about the equity markets, the decline in rates will have a positive impact on market valuation. Uncertainty about the Fed's next course of action and the expected economic slowdown will dampen any possible appreciation that the decline in rates may bring about during the third quarter. We put the odds at less than fifty percent that the equity markets will outperform the fixed income market during the third quarter. However, as the year comes to an end, the likelihood of the equity market outperforming the fixed income market increases substantially.

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