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Note: This fourth quarter 2000 report was written following the surprise announcement of a 50-basis-point
interest rate cut on January 3, 2001, stunning the markets but also awakening investors to the
state of the U.S. and global economic slowdown.
Sector Rotation Revisited Our third quarter Shareholder Report commentary accented the change in market direction away from new economy sectors (e.g., technology and Internet-related) and toward old economy sectors (e.g., manufacturing). Despite the fact that the third and fourth quarters were really just a continuation of the second quarter’s patterns – suggesting that the sector rotation was in place as early as April 2000 – it did not strike investors until third quarter earnings reports hammered the marketplace in October. The fourth quarter was the worst performing quarter of the year for the S&P 500, driven almost solely by technology and communication services. The year ended on a down note with the S&P posting a loss of 9.1 percent on a total return basis, its worst performance since 1977. The Nasdaq Composite plunged 39 percent, the worst year since its inception in 1971, and the Dow Jones Industrials fell 6.2 percent, the worst since 1981. The Wall Street Journal dubbed 2000 the "Year of Living Dangerously," an apt description of the market’s volatility and dramatic sector rotation. Almost all of the losses can be ascribed to the poor performance of technology and telecommunications. Economic Slowdown We revised our outlook for gross domestic product (GDP) to be between 0-2 percent in the first half of 2001, which classifies the expectation as a "hard landing." For 2001, First Call now forecasts earnings growth of 9.2 percent, down substantially from forecasts made by Wall Street only six months ago. Value vs. Growth... massive rotation The graph below shows the performance of BARRA Value and BARRA Growth versus the S&P 500, with the two segments performing in opposition to one another again in 2000. BARRA Growth topped out in April when BARRA Value bottomed. By the end of the year, Value outperformed Growth and the S&P 500. The cyclical nature of these rotations represents investors switching from value to growth. 
Metaphorically speaking, the stock market appears to breathe in value and breath out growth-- an amazing cyclical pattern for investor awareness. Furthermore, investors should manage their expectations by knowing which group is in favor, growth or value. |
