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January Small-Cap Rally Seen Likely Again Next Year

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LITTLE wonder that the eyes of Wall Street are now on small companies. For many investors, a not-so-funny thing happened on the way to the end of 1993: The steady rise in the stock value of small companies - what Wall Street calls small-cap stocks - has fizzled.

Instead, stocks of large blue-chip companies, which started off the year looking weak, are going out with a bang, with stock values rising for firms listed on the New York Stock Exchange.

The question being asked on Wall Street is whether this divergence will end soon and small-cap stocks will start to rise again in the next few weeks.

That is what often happens. Traditionally, issues of smaller companies register gains in January, following some selling off of stocks by investors for tax purposes late in the year.

If small-cap stocks do not post gains, what would be the financial impact on the companies themselves? The well-being of small companies is important not only because of earnings prospects for investors, but because small companies tend to be the main source of new job growth.

Over the past quarter century, between Dec. 1 and Jan. 31, the Dow Jones industrial average has gained 4.5 percent on average. The NASDAQ composite index has gained even more - 6.4 percent - notes James Stack, editor of InvesTech, a market newsletter. Investors should be cautious

But given current high valuation levels, bullish sentiments about the market, as well as the huge investments in individual stocks and mutual funds in recent months, Mr. Stack says a few red lights may be flashing. Investors should be cautious, he adds.

So far, 1993 has been a good year for many small-cap stocks.

The NASDAQ index, for example, rose sharply in January and did not fall until mid-February. It wobbled back up in March, declined in April, and then began a steady upward course that has continued much of year.


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