Rational Advisor

Many of the forces that have propelled shares of big companies in the past are once again falling into place.

Overseas economies are strong and especially for US based large caps, the US dollar is weak, benefiting companies that do business abroad. Also, US large-cap stocks are moderately priced relative to their earnings. And the stock market had a shaky summer, making the relative stability of large companies more appealing.

I know, many money managers have repeatedly predicted a resurgence of large-cap dominance in recent years only to be proved wrong, or at least premature.

But large-cap indexes outpaced smaller-stock measures in each of the last two quarters and are on pace to come out on top for the year for the first time since 1999. That’s because large-caps held up better during the stock market’s deep sell-off this summer and have jumped more in the recovery that began last month.

Large-caps led the way through much of the late-1990s bull market as investors fell in love with technology giants such as Intel and Cisco Systems. But overvalued large-caps fell hard in the bear market that struck in March 2000, clearing the way for small-caps.

Vanguard Group in the US, for example, is planning to launch three funds that will invest in so-called mega-cap stocks — the largest of the large-caps, such as General Electric Co. and Microsoft Corp.

Multi-cap managers in the US over the last two years have shifted about $25 billion out of small-cap and mid-cap stocks and into large-caps, according to Lipper.

The large-cap reawakening is being paced by tech and other growth stocks that have strong earnings prospects despite a slowing U.S. economy.

That doesn’t mean small-cap and mid-cap shares will falter. Even if the large-caps shine, the performance gap is unlikely to be as wide as was when small stocks outperformed. And if the US Federal Reserve helps the economy skirt a recession,

The scenario for large-cap outperformance is going to remain in place as long as international economies are doing well and the dollar is weak.

The strength of European and Asian economies helps US companies with sizable foreign operations. And the weak US dollar gives a boost to companies such as McDonald’s and Caterpillar when their sales in strong overseas currencies are translated back into dollars.

Bulls say large companies have boosted earnings and become increasingly efficient in recent years. But their moderate stock-price gains mean valuations are reasonable.

As always, a lot depends on the economy.

All stocks would suffer if the economy turned down. But given their big rise, small stocks could be most at risk.

Large Cap stocks in US and Canada are also large dividend issuers, and this offers a greater deal of certainty. So, as the markets become more volatile, investors may look for areas of safety and prefer Large Caps both Canadian and US.

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