December 22, 1999

Our outlook for next year is for the economy to grow by 4.26%. We also expect an 8% increase in real earnings. Our outlook for interest rates is less certain. The Fed has provided a tremendous amount of cash in anticipation of Y2K-related liquidity needs and how it soaks up that excess money next year will have a great impact on interest rates and inflation. Since the increase in the base came in the form of repos, theres an automatic mechanism for extinguishing the Y2K-related base expansion. This leads us to believe that Y2K will be a non-event for inflation and interest rates. The one remaining question in our minds is how the Fed will react to continued strong real GDP growth. Even if the Fed tightens again, our outlook for the market remains positive. We look for stock returns to outperform fixed income returns.

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