Stocks of small L.A. companies heat up in summer.

Local index rises 4.8% after dropping 4.05% in spring

Indications of an improving Los Angeles County economy, coupled with a waning o investors' fears about the Northridge earthquake's impact on local businesses, helped buoy the Los Angeles Business Journal Small Cap 100 stock index this summer.

After plunging in the spring quarter due to four successive interest rate hikes by the Federal Reserve Board, the LABJ Small Cap 100 rebounded smartly between May 31 and Aug. 31, when the Federal Reserve Board raised rates only once.

The LABJ Small Cap 100 is a stock index of 100 Los Angeles County companies wit market capitalizations of between $7 million and $70 million. It was created fo the Los Angeles Business Journal by Santa Monica-based investment management firm Wilshire Associates Inc.

The index rose 4.8 percent over the summer quarter, after having dropped 4.05 percent in the prior three-month period.

During the summer quarter, the LABJ Small Cap 100 bottomed out on June 28, dipping 3.97 percent below its May 31 level, and then rose 9.3 percent from there to its summer finishing point.

The LABJ Small Cap 100's performance in the summer quarter largely mirrored tha of the S&P 500 index, which gained 4.87 percent. The S&P 500 bottomed out two days earlier than the LABJ Small Cap 100, and peaked on the same day the LABJ Small Cap 100 peaked.

The California Small Cap Index, which includes 384 small public companies located throughout the state, rose 8.05 percent during the summer quarter, afte plunging 7.66 percent in the March-through-May spring quarter.

Meanwhile, the Wilshire Small Cap Index, a national index of small capitalization companies, rebounded 5.38 percent during the summer, after falling 6.23 percent in the spring.

The four indexes (see accompanying charts) followed similar patterns: Each continued its spring slump through June and then rebounded to a peak in the las two days of August.

The LABJ Small Cap 100's bounce-back hints at an upward trend in the local economy, according to Dennis Macheski, director of research at the Costa Mesa office of national accounting firm Price Waterhouse. Macheski cautioned that th rise would have to continue in the fall quarter to confirm the apparent recover as an actual trend.

Jack Kyser, chief economist at the Economic Development Corp. of Los Angeles County, a non-profit business association, agreed with Macheski that one must b careful in using the stock market as an indicator of what is going on in the local economy.

"The stock market makes unexpected moves and tends to overreact to what is goin on," Kyser said. For example, investors are currently experiencing widespread paranoia about inflation, Kyser asserted. On Sept. 9, the wholesale price index showed a larger-than-expected rise, and the stock markets were hit by a selling frenzy. Four days later, the consumer price index showed only a modest increase so investors made a 180-degree turn, decided inflation was not a threat after all, and resumed buying stocks.

Although the market is often buffeted by international events and various non-economic forces, Kyser said he believes the rise in the California indexes indicates a recovery is underway.

In early September, the California Department of Finance, which had previously reported that the state's total job base was shrinking by 1 percent a year, reversed itself and declared that the state's total number of jobs has actually been increasing at an annual rate of 1.3 percent since March 1993. The department is not expected to break out county job figures until March 1995. However, employment figures from the California State Employment Development Department show that 3.657 million people were employed in L.A. County in July, 1.9 percent fewer than a year earlier.

"The interim employment series calculated by the Department of Finance indicate that there is a stronger recovery underway than most people give us credit for, Kyser explained. In addition to the LABJ Small Cap 100, Kyser identified severa indicators which suggest a recovery is underway in L.A. County.

Specifically, Kyser pointed to a boom in international trade (both imports and exports), a turnaround in retail sales, a recovery in new construction, and upturns in several sectors of commercial real estate -- most notably industrial and retail.

"The national media have perpetuated the cliche that California's economy is in the tank and won't recover soon," Kyser said. "However, the smart money sees that we are recovering. And that is probably what is fueling the increase in th LABJ Small Cap 100. Talking to business people here, you sense a more optimisti mood."

Kyser and Price Waterhouse's Macheski both said they believe the earthquake fears of last spring have been replaced with confidence that Los Angeles has recovered and will do fine.

Small cap companies are expected to lead L.A. County's economic recovery. "Ther have been a lot of stories about problems with small cap stocks, and yet you se this increase in the indexes," Kyser stated. "That indicates increasing investo confidence in the local economy."

Macheski appeared a bit more cautious about L.A. County's turnaround; although he said he is bullish on other parts of the state. Using retail sales, property prices and investor interest in properties as his gauges, he expressed the view that Orange County, the Inland Empire and much of Northern California have clearly turned the corner.

He said he sees no evidence that things are getting worse in L.A. and San Diego counties and feels that both are bubbling at the bottom and getting ready for a recovery. In L.A. County, retail sales have been up for nearly six months and housing prices have stabilized. According to Macheski, the number of investors who have come to Price Waterhouse looking for investments in L.A. County has recently picked up noticeably for the first time since 1989.

"Enough indicators say the economy has turned around, but we are still fighting the bogey man of concern about aerospace layoffs," Kyser declared. The announcement of layoffs at Hughes in early September show that aerospace downsizing continues. But Kyser said he believes that out of that industry's chaos, we will see new companies emerge, introduce interesting products, issue stock and further drive the small cap sector.

The fundamentals supporting the Los Angeles economy and labor force are much stronger than the typical area in the nation, and this augurs well for strong economic recovery here, Macheski suggested.

"The percentage of our labor force that has a college degree is 30 percent higher than the rest of the nation," he said. "The high-skill sector of the economy here is about 1.5 times the national average."

L.A. has many more management and engineering consultants, computer firms, biotech companies, lawyers, accountants and other high-skill positions than mos parts of the country.

"These are the sectors that tap into the Pacific Rim and growing markets worldwide," he said. "These are wealth-producing and also job-producing sectors So I believe that L.A. County is fundamentally stronger than most other places.