Monday, April 30, 2007

Big Stocks Finally Beating Small Stocks

From the WSJ:

For months, Wall Street professionals have been recommending big-company stocks as a safe bet in a slow-growing economy, only to be proven wrong as small stocks surged ahead.

Now, after the Dow Jones Industrial Average's run this month to records and its first close above 13000, gains for blue-chip industrials this year are equal to those of the small-stock Russell 2000 index. Both are up 5.3%. But for just this month, the industrial average is up 6.2%, compared with 3.6% for the Russell.

The gains for big household names like those in the industrial average were fueled by quarterly earnings gains that beat expectations for the likes of 3M, Microsoft and Exxon Mobil. Microsoft, for instance, posted a 65% earnings surge and its stock jumped 3.5% in one day on the Nasdaq Stock Market.

......

The common wisdom has been that large companies, which often have more-extensive overseas operations than small companies, are better positioned to withstand a softer U.S. economy. They also benefit from a weaker dollar because profits in foreign currencies look more impressive when translated into dollars. The U.S. currency on Friday touched its lowest point against the euro since the launch of the common currency in 1999.


Strong international sales have been a common theme for the duration of this earnings season. Many large companies have literally the same reporting template: weak US economy, strong international demand.

However, how much of the gain in sales is actually due to stronger sales and how much is actually due to the dropping value of the US dollar relative to other currencies?

This has been a theme of the WSJ's blog for the past week or so.

Here's a chart of the Dow versus the Russell 2000 for the last 4 years and the last week.

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