As badly as the Dow Jones industrial average has been performing over the past eight weeks, the blue-chip stocks that make up that indicator are still doing a whole lot better than the shares of smaller companies.
Which brings up two questions: Are blue-chip stocks vulnerable to further price declines until they catch up with smaller stocks? Or is there some mitigating factor at work that makes these larger-capitalization stocks a much more attractive investment now than small stocks?
The answer to that question, of course, is vital for anyone who has enough nerve to want to invest in the stock market right now and is debating whether to go after shares of big or small companies.
Unfortunately for those investors, there aren't any concrete answers -- just theories -- for why big stocks are doing so "well." First, take a look at the numbers.
The Dow, which is made up of 30 big stocks like American Telephone & Telegraph Co., International Business Machines Corp. and General Electric Co., has fallen around 20 percent since mid-July. During that same period, the Nasdaq index of over-the-counter stocks is down nearly 31 percent. (The Standard & Poor's 500 index -- made up of 500 medium-size stocks -- and the Wilshire 5,000 index are down about as much as the Dow.)
Experts would ordinarily expect solid blue-chip stocks to outperform their weaker Nasdaq cousins in a bear market. Small companies, after all, might be hurt by a recession more than big companies. But the huge discrepancy in the performance of these two sectors of the stock market is puzzling many experts.
Now for some of the theories. The stocks of bigger companies are staying at better levels because:
Theory 1: Institutional investors are doing most of the buying on Wall Street nowadays and they, unlike small investors, are attracted more to top-flight companies.
Theory 2: Large companies tend to do more of their business overseas, where economic conditions aren't as bad as they are here.
Theory 3: These large stocks are the ones used in computerized trading programs. So they tend to take part in any market rally, whereas small stocks don't.
If any of these theories ultimately prove valid, then high-quality stocks may not be a bad investment at this time. But if the theories are faulty (either because institutional investors lose their craving for big stocks, or because the European economy slumps along with the United States), blue-chip issues could be in for some very rough times ahead.
Looked at another way, the Nasdaq index right now is just 7 percent higher than where it was before the bull market started in 1983. Even after its recent decline, the Dow is still 70 percent higher than 1983 levels.
If blue-chip stocks ever decide to mimic the full Nasdaq decline, the Dow could fall another 1,000 points.
Matsushita Electric Industrial Co.'s recent interest in MCA Inc. gave Wall Street hope that, finally, foreign companies were again becoming interested in buying American firms.
But sources in the mergers and acquisitions business said drawing that conclusion would be wrong. Foreigners, they said, aren't showing much interest in U.S. companies even though the dollar and American stock prices have both become extremely weak recently.
One investment banker said both European and Japanese banks are in such internal chaos that lending money to corporations that want to make acquisitions is the furthest thing from their minds. And there are only a handful of companies -- Matsushita being one of them -- that could make a substantial acquisition without having to borrow heavily.
Mergers and acquisitions were down sharply this year, which has cut into Wall Street's profits as well as the earnings of investors who play the takeover game. According to accounting firm KPMG Peat Marwick, the total number of deals around the world dropped to 1,884, compared with 2,052 in the same period last year. The value of deals this year totaled $84.3 billion, compared with $88.2 billion last year.
Other sources who generally handle American companies buying other American companies say business hasn't improved there either. While the usual divesting of unwanted businesses is going on at some corporations, few appear interested in expanding through acquisitions.
The long and short of the situation is that the mergers and acquisitions business -- once thought to be only on a hiatus from the pace of the 1980s -- may not rebound any time soon.
Ever since Chase Manhattan led the way a few weeks ago, a growing number of banks have been reducing dividend payments as one way to get their financial houses in order.
Who'll be next? Prudential-Bache Securities Inc. recently posted these odds for some of the largest banks:
Above 50 percent probability within one year: Citicorp, Manufacturers Hanover and First Interstate.
Between 25 percent and 50 percent probability within one year: Bank of New York, First Chicago, PNC Financial and a second cut at Chase Manhattan.
Between 25 percent and 50 percent probability within two years: Barnett Banks, C&S/Sovran, Corestates, First Union, Norwest, Security Pacific, SunTrust and Wells Fargo.
Between 10 percent and 25 percent probability within two years: Banc One, BankAmerica, Bankers Trust and Boatmen's.
Tougher regulations by government authorities trying to head off a savings and loan-type fiasco, bad real estate loans and threats to their debt ratings are behind the dividend cuts at banks. Also, as the prices of bank stocks decline, the dividend yields are becoming too high to justify. John Crudele is a columnist for the New York Post.