How well your investments perform for the rest of this year may well depend on your cap size.
And some top financial experts suggest donning the "big caps," then hanging on when the ride turns wild, as it did last week.
Large-cap stocks are nothing more complicated than those of big companies, and analysts say that's where the action is.
But not just any big caps. Look for the highest quality companies such as General Electric, Ford, and IBM or else mutual funds that focus on them.
Wall Street calls these companies high-quality, big-cap, growth stocks, and the terminology means the very best companies with the greatest potential for increasing profits.
Power house companies
These are the blue chips. They are not only a powerful force in the business world but also a haven for investors who have been burned by Asian markets and disappointed by small-company stocks in the US.
Analysts say the demand for these shares, coupled with a strong US economy, could make them the stellar performers in a year in which the stock market has already set a series of records.
"Blue chips will continue to dominate the market," says Raymond Worseck, chief economist with investment house A.G. Edwards & Sons, St. Louis.
"We now have a new type of investor who, until the last decade or so, had never invested in the market. He [or she] is investing through 401(k) and other employee-benefit plans."
These investors, including some 80 million baby boomers born between 1946 and 1964, are expected to continue pouring money into stocks, and they prefer companies they know: high-quality, big-cap companies such as Coca-Cola.
This is a market "driven by money," Mr. Worseck says. Well-known companies are the beneficiaries.
They are also companies that should extract the most gain from the US economy, whether it proceeds at the brisk 5.4 percent growth rate posted for the first quarter or the expected slowdown when second quarter results are reported (see Page B2).
And they are the companies, say analysts, most able to withstand the volatility brought on by the Asian financial crisis. They are also in the best position to profit from that crisis in the long term.
General Electric, for example, has snapped up a number of Asian companies at bargain prices.
Some top-performing mutual fund companies that specialize in these big-cap, high-quality growth companies include:
* Alliance Premium Growth: up 38.1 percent for the year through July 22 (800-221-5672).
* Putnam Investors: up 27.8 percent for the year (800-225-1581).
* Phoenix Seneca Growth: up 25.8 percent this year (800-243-4361).
* Fidelity Advisors Equity Growth: up 25.3 percent in 1998 (800-544-8888).
* Fidelity Blue Chip: up 24 percent for the year through July 22 (800-544-8888).
Prominent market strategists such as Abby Joseph Cohen of Goldman Sachs and Rao Chalasani of Everen Securities see the market still cresting upward in the months ahead, despite last week's setback of about 400 points.
Mr. Chalasani, for example, has talked about the Dow possibly reaching 9500, although he says he is beginning to find that benchmark a little "suspect" given the slowing economy. (The Dow closed last week at 8937.)
The top market strategist at Lehman Brothers in New York waxes even more optimistic, looking for a Dow over 11000 by year's end.
But even if stocks go through a normal correction of 5 percent or 10 percent, many experts see nothing in sight to arrest the flight of the big-cap giants.
"This is totally a momentum-driven market," says Arnold Kaufman, editor of The Outlook, a financial newsletter published by Standard & Poor's Corp. "The gains are feeding on themselves, with the big guys [the blue chips] carrying the market," he says.
"We're talking a very small slice of companies," says Mr. Kaufman. Within the S&P 500, for example, some 150 companies out of 500 "account for 75 percent of the entire market value of the index."
But he does not necessarily advocate blue chips to the exclusion of everything else.
"You have to ask yourselves some hard questions," says Kaufman. " 'What are your investing goals?' 'What do you hope to gain?' If you are in for the long-term, say three years or longer, then you clearly want to be diversified and have assets in small-cap stocks, or funds with low correlations to large-caps, such as REITS, (real estate investment trusts), or selected utility stocks," Kaufman says.
Market experts such as Steve Savage, managing editor of Value Line mutual-fund products, also urge smaller investors not to overlook overseas stocks, using an international or global mutual fund.
"If the economy does slow," that should give a boost to small-cap stocks, "which are often less dependent on overseas earnings than large-company stocks," says Lewis J. Altfest, president of financial firm L.J. Altfest & Co., New York.
Finally, say strategists such as Neil Eigen, a managing director for mutual-fund house J. & W. Seligman, don't overlook large- and small-cap value stocks, just because the current market has favored growth stocks.
Value stocks are good companies overlooked by the general market, and historically, he notes, they have outperformed their growth-stock brethren, which tend to rely on market momentum.