Transcripts

The Silent Small Cap Comeback

SUSIE GHARIB: The psychological boost of Dow 14000 has been spreading to other areas of the market. Even small cap stocks have rallied as investors hunt for bargains. But as Erika Miller reports, most experts don't think it's wise to bet big on small caps.

ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: While the spotlight has been focused on large caps lately, small caps have been quietly staging a comeback. The Russell 2000 index of small cap stocks is just 24 points away from its all time high hit in mid-July. Since the recent market low of August 16th, the Dow and the S&P 500 have gained about 9.5 percent each. The Russell is not far behind, up 8 percent. But Standard & Poor's market strategist Alec Young predicts large caps will continue to lead.

ALEC YOUNG, MARKET STRATEGIST, STANDARD & POOR'S: As we look into 2008, we're looking for about 2 percent GDP growth. But with the housing market remaining weak, there is a risk of a hard landing. And as a result, we think investors are going to continue to gravitate toward larger cap, higher quality companies.

MILLER: Large caps are also benefiting from weakness in the dollar which boosts exports. It also increases the value of profits companies earn abroad.

YOUNG: They're earning more and more of their revenues in pounds and euros. And when they bring those currencies back to the states and convert them into dollars, because of the dollar's weakness against those currencies, those currencies convert back into more dollars. So it boosts profits for large cap companies.

MILLER: Small cap companies on the other hand, tend to generate most of their business domestically. So they get less benefit from the dollar tailwind. In addition, many foreign economies are growing faster than the U.S. economy, also giving big U.S. multinationals an edge. Portfolio manager Mark Zavanelli says it's doubtful small caps will regain their leadership this year.

MARK ZAVANELLI, SMALL CAP PORTFOLIO MGR., OPPENHEIMER FUNDS: It would require a change in valuations, a change in the risk-seeking behavior of the market. If small cap companies, if their earnings did very well, thus making them look a lot cheaper. If the economic environment looked like it was ready to accelerate.

MILLER: Many analysts are betting that we are at the beginning of a multi-year large cap leadership cycle. That's a big switch from the past six years, when small caps outperformed. Erika Miller, NIGHTLY BUSINESS REPORT, New York.