March 29, 1999

Financial analysts spend a lot of time trying to identify the "drivers" or influences that explain overall market performance as well as the performance of various sectors within the market. If these drivers can be identified and measured, it is assumed that if they are replicated at a different point in time then the overall markets performance and the relative performance of various sectors should be repeated across episodes. It is also assumed that abrupt changes in the drivers result in major inflection points and changes in market leadership. Over time, as the economy adjusts, a trend will develop as the various sectors approach their long run rates of return. Alternatively stated, if theres no change in the drivers, the trend could be used to identify long-run winners. We believe the current market affords such an opportunity. Our view is that, under the Greenspan price rule and Republican Congress, the economic environment is one of low inflation and low effective-marginal tax rates. Weve argued that this environment favors large-cap growth stocks.

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