June 20, 2002

Last quarter we argued that the probability estimates produced by our model were consistent with a short-lived burst of economic activity during the first half of the year with the market rotating to value stocks. Among the policy signals that we were looking for in order to get a sense of a likely change in direction were: 1) The permanent repeal of the death tax and reduced uncertainty (which would clearly favor the growth stocks). 2) The overall impact of Enronitis and the regulatory fallout. 3) The protectionist steel legislation. The latter two actions would increase the regulatory burden and thus favor the smaller capitalization stocks. The failure of the attempt to make the repeal of the death tax permanent also works in the same direction. Insofar as they slowdown the economy and future earnings, these signals also favor the value stocks over growth stocks. Whether our theory is correct we will never know with absolute certainty for there are other reasons for the surge in value stocks. Most cyclical stocks are in the value camp and during recoveries the earnings of the cyclical companies tend to bounce back stronger and faster than other companies. The bottom-line is that any way one slices the data, the analysis points to the value stocks this year.

You must have an active account to view these reports. You may register for a trial here

Download Complete Report in PDF Format

Download Complete Report in Word Format