Indeed, the prices of holdings favored by most fund managers spiked to stratospheric levels. And in the mid-1990s large-company corporate earnings generally met expected targets. But often, smaller companies offered much better economic fundamentals, and in those cases, Wall Street had to scramble to explain why only big-cap investments made sense. More than anything else, it was the need for a story the Street could use to make pricey big-cap investments plausible--coupled with the fact that the media tend to focus on Wall Street but don't always understand it all that well--that launched the "Big Is Back" campaign.
Apart from simple investment liquidity, Shulman points to three other arguments Wall Street promulgated in support of big-cap stocks:
Near-monopoly positions. Large companies like Intel and Microsoft so dominated their markets that they could effectively set prices and ignore pathetically weak competitors.
Globalization. Only the biggest companies could afford to be in several markets at once, an advantage in hedging against a recession in any one country.
Procurement power. Big brand-name companies--such as Boeing, Ford, and Disney--can squeeze suppliers for price concessions and insulate themselves from profit pressures.
All of those attributes were supposed to protect big-cap company earnings and justify stratospheric stock prices, particularly when compared with the attributes of more vulnerable little companies. But in retrospect, there was much to doubt about that story.
For one thing, bigness has little to do with access to foreign markets. Fully 96% of exporters are small businesses. Far from suffering under intolerable wage and price pressures, those small companies pay wages comparable with those paid by the biggest companies. And while cornering the market on stock microprocessors or operating systems might well be profitable, increasingly, such products are commodities around which higher-end, more lucrative components and innovations are assembled. That's why the small companies are doing so well, even if Wall Street doesn't recognize it.
So no one should have been surprised when last October, Boeing--the very model of a monopoly, a globalized, oppressive big-cap company--predicted it would lose a record $2.6 billion over the ensuing 15 months. Early in the decade, the company had done exactly what Wall Street said it should do: ruthlessly cut back by 50% the number of suppliers it used, to "streamline" and cut costs. Boeing discovered that that strategy also gutted the skills and production capabilities of its crucial supply chain to the point where it could not meet demand.
"Ten years ago, if we bought rubber hoses, we might have bought them from 10 suppliers, and today we'd buy them from 3," explained Ron Woodard, president of Boeing Commercial Airplane Group, to the Seattle Times last October. "There are cost advantages and all that, but there's a downside. If one supplier doesn't come through, you've lost a third of your supply source." Even mighty Boeing had become dependent on small companies throughout its supply chain.
At the same time, despite their supposed advantages, much-hyped companies like Gillette and Coca-Cola failed to meet earnings projections. "The markets began to realize the big guys aren't perfect," recounts Shulman, "and maybe they were overvalued."
Wall Street's "Big Is Beautiful" story further crumbled with the collapse of Asian currency markets last summer, an event that undermined one of the key advantages largeness purportedly conferred: global reach. For three years big-cap stocks had been hyped on the theory that large companies could open offices overseas and take advantage of foreign opportunities more quickly than small companies could. Now, with an Asian meltdown in progress, that same attribute was seen as exposing big companies to a far greater risk, the caprices of overseas markets. "The allure of globalism has been tarnished," wrote Shulman in an October investment report.
Seemingly overnight, Wall Street shifted billions out of once-favored big-cap stocks into smaller domestic stocks, triggering rallies in the Russell 2000 and other small-cap stock indexes. For the first time in three years, small stocks outperformed large ones.
The moral of the story is that the fables Wall Street tells itself, no matter how widely they're publicized, don't necessarily reflect the rest of the economy. "Just about 7,000 companies are publicly traded," says small-business expert David Birch, and those amount to perhaps 15% of the nation's net growth. "Wall Street is a tiny part of what's really going on."
It's Not the Size; It's the Coordination
At a deeper level, while big companies are unquestionably part of the economic landscape, and supply chains are generating even larger production networks, those who study company organization are concluding that 1950s-style "big" can't possibly make a comeback. Size, in fact, seems increasingly irrelevant to business success.
One sign of that new awareness is that the old theory of why companies become big in the first place is in total disarray. In the past, economists claimed that bigness reduced transaction costs. If each person in a production team--a welder and a painter; a graphic artist and a secretary--was an independent company, the time and effort of bargaining over prices, delivery, or quality would overwhelm the whole operation. Worse still, people with special skills no one else could match might threaten to hold up everyone else for more compensation. Big companies, it was thought, solved those problems by bringing everyone under one set of rules that dictated how everyone interacted.
