A Rotation in the Works

Chart of the Week for October 29-November 4, 1999

In the first two quarters of the year, investors showed a clear preference for the growth style of investing. The third quarter was less clear, as all major indexes declined. Initial signs are developing in the fourth quarter that large-cap stocks may once again regain their strength from the first half of 1999. The S&P 500 Index is beating the Russell 2000 and S&P MidCap 400 Indexes quarter-to-date.

The third quarter of 1999 saw the S&P 500 decline for three consecutive months, the first time this has happened since 1990. Even though rising interest rates, inflation fears, and an outlook for lower earnings depressed most stock valuations, the technology sector posted gains. This sector was the only sector to post positive returns for the period.

Two main reasons why the S&P 500 is starting to post stronger gains then its peers during October is strong corporate profits by the mega-cap companies and an outlook that interest rates will not increase after November for the foreseeable future. Larger companies, such as those in the S&P 500, are inclined to move more dramatically as interest rates move due to their typical large borrowing costs.

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