Rising small-cap shares leave big stocks in the dust Recovery is said to favor NASDAQ

November 21, 1992|By Ian Johnson | Ian Johnson,New York Bureau

NEW YORK -- As blue-chip stocks continue to lurch through a disappointing year, small-company stocks are jetting upward, thanks to confidence in the economy and worries about overseas economies.

Two indexes that trace small stocks closed yesterday near all-time highs, with the NASDAQ Composite up 4.04 points, to 642.61, just a hair off its record of 644.92, set in February, and the Russell 2000, which follows generally smaller companies, up 1.09 points, to 209.77, also near its record high of 212.61, set in February.

Although many analysts believe that small stocks have been basically bullish since 1990, the most recent rally started in early October. Since then, the NASDAQ Composite has risen 10 percent and the Russell 2000 8 percent. At the same time, the Dow Jones industrial average, which reflects 30 big-company stocks, has risen less than 1 percent, despite yesterday's rise in the Dow of 17.83 points.

The figures highlight a turn by many investors away from big industrial companies to small companies that may be better able to take advantage of the hesitant recovery and the incoming Democratic administration, said Claudia Mott, a small-stock specialist for Prudential Securities Inc.

"The fiscal stimulus that they bring in can benefit small companies more quickly," Ms. Mott said. "They can take advantage of it more quickly."

International worries have also strengthened small stocks.

A rising dollar means that companies that depend on exports -- generally larger ones -- will have a tougher time.

And with most European economies in or near recession, few markets exist for the giant companies' products. Compared with most countries, the United States will probably grow briskly, meaning more opportunities for companies that are active at home.

Another consideration, Ms. Mott said, is that small companies' earnings have been higher than those of big companies.

A Prudential study, she said, showed that while small companies' earnings have shot up 30 percent this year, big companies' profits were up only 8 percent.

John H. Laporte, of Baltimore's T. Rowe Price, said small stocks have been bullish since 1990, although they did drop drastically in June and stayed sluggish for most of the summer. Although further corrections are possible, he said, small stocks could perform well for the next few years.

"I don't know if this rally will continue, but we firmly believe that we are in a bull-market cycle," said Mr. Laporte, who heads the New Horizons Fund, one of the country's oldest small-stock mutual funds.

Henry Otto, the small-stock portfolio manager for Brandywine Asset Management Inc. in Wilmington, Del., agreed that small stocks are in an up cycle.

But he said that investors could become worried that the new administration could saddle small companies with costly retraining and health programs.

On the other hand, such new programs may exempt small companies, Mr. Otto said, so investor confidence in small stocks, also called small-cap stocks, probably will vary according to the details of the economic programs.

"The current economic situation isn't entirely clear, but small caps should benefit the most," Mr. Otto said.

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