September 23, 2002

We are now using two distinct earnings measures to calculate the likelihood of equities outperforming fixed income. Based on our forecasts, the probability of equity outperforming the fixed income market is estimated to be 50.3% when as "reported earnings" are used in the model. In turn when "operating earnings" are used the probability declines to 35.2%. Either way one looks at it, short of a major shock, the equity markets are not expected to rise by much if at all. What worries us is that the futures markets are forecasting a further decline in rates/yields during the fourth quarter. The markets do not see rising rates until the end of the first quarter of 2003. If we are willing to assume that the inflation rate will remain near the deflation/price stability range, then the markets must be forecasting a slow recovery that will not gain steam until the first quarter of 2003. (full article attached)

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