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 he
consensus among the pundits is that the world has changed since
the terrorist attacks on September 11. Yet, as I
reported previously on NRO Financial, many of the sectors that
did poorly in the aftermath of the terrorist attack had already
been experiencing deteriorating earnings. Insofar as the uncertainty
is reflected in the market interest rates, and the past is captured
by a history of earnings, we may be able to estimate the likelihood
of value stocks outperforming growth stocks and vice versa.
The history
shows that the market continues to favor growth stocks, and it is
a good bet that this will continue to be the case over the next
four quarters.
Such a forecast
is consistent with the Fed rate cut extending the surge of growth
stocks until the economy shows signs of life. It is also consistent
with a short-lived burst of economic activity in the next two quarters,
with the market rotating to value stocks sometime during the latter
part of the year. And if the recovery is stronger and more durable
the market should remain a growth one.
To be sure,
the policy actions taken during the next few weeks will set the
stage for the new year. A capital-gains tax rate cut, accelerated
depreciation, and reduced uncertainty would clearly favor growth
stocks over value stocks. However, a cautious strategy of waiting
to see how the economy behaves before pushing the stimulus package
(i.e. tax-rate cuts) would only make the recovery weaker, favoring
value stocks.
For now, the
market seems to be betting on the growth stocks, and we can only
hope that the right policy actions make the bets pay off.
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