Betting on Growth
The market continues to favor growth stocks.

By Victor A. Canto, Chairman of La Jolla Economics,
and Christian Carrillo
October 4, 2001, 8:00 a.m.

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.