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Small caps make big gains, extending sector’s rebound

Times Staff Writer

Small stocks are once again looking like big ideas after their prices rocketed Monday, extending the category’s sharp rebound since mid-July.

The Russell index shot up 2.3% for the day, compared with a 0.7% gain for the big-cap Standard & Poor’s 500 index and a 0.4% advance for the Dow Jones industrials.

Stocks overall benefited from a continuing decline in the price of oil, but a Federal Reserve report showing that more banks are tightening their lending standards kept a lid on the day’s rally.

Small-company shares have been outperforming big stocks since about mid-May, when the S&P; 500 reached its spring high.

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From May 19 to July 15 the S&P; plunged 14.8%, while the Russell index was down a more modest 10.3%. And since the market rebound began July 16, the S&P; has risen 7.4% while the Russell has zoomed 13.4%.

Small caps are being driven in part by investors who are placing early bets on a hoped-for U.S. economic recovery, some analysts say.

Satya Pradhuman, director of research at Cirrus Research in Tarrytown, N.Y., said the stocks’ lift reflected “a little bit of ‘contrary’ buying” -- as in contrary to what the current weak economic backdrop would suggest.

Because earnings growth is generally stronger at smaller companies than at bigger firms over time, small-cap stocks often lead the market as the economy rebounds.

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Several other factors also are underpinning the shares, said Lori Calvasina, U.S. small- and mid-cap equity strategist at Citigroup Inc.

Compared with mid-cap and large-cap stock indexes, the Russell 2,000 has a smaller concentration of energy stocks and a larger helping of financial shares, Calvasina said. That has been a boon lately as energy stocks have plunged with crude oil while financials have rallied off their lows.

Finally, attractive valuations among small stocks are prompting increased merger activity, Calvasina said.

She said it was too early to predict an economic revival, but she called the small-cap surge “more than a snap back. There are some really good, solid drivers behind the rally.”

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Among the day’s market highlights:

* The Dow rose 48.03 points to 11,782.35, after being up more than 130 points. On Friday, the blue-chip index shot up more than 300 points.

* Crude futures fell 75 cents to $114.45 a barrel after slipping to $112.72. Oil has lost more than $30 a barrel since closing at a record high in early July.

* The dollar, whose recent strength has helped drive oil lower, was mostly higher Monday against other major currencies. Gold prices plunged.

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* Bond yields jumped. The 10-year Treasury note rose to 4% from 3.93% late Friday.

* Consumer discretionary stocks gained because the drop in oil could make people more willing to spend money. Target rose $2.49, or 5.1%, to $51.23, while Starbucks gained $1.18, or 7.8%, to $16.30. Amazon.com surged $7.58, or 9.4%, to $88.09

* China’s benchmark Shanghai composite index sank 5.2% after economic figures showed wholesale price inflation jumped last month to its highest level in 12 years.

* Elsewhere overseas, key stock indexes surged 2% in Japan, 1% in Britain, 0.7% in Germany and 1% in France.

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walter.hamilton@latimes.com

The Associated Press was used in compiling this report.


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