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Stocks roll toward a complete recovery

  • Article by: NATHANIEL POPPER
  • New York Times
  • January 25, 2013 - 11:39 PM

Americans seem to be falling in love with stocks again.

After millions of people all but abandoned the market after the 2008 financial crisis, individual investors are pouring more money than they have in years into stock mutual funds. The flood, prompted by fading economic threats and better news on housing and jobs, has helped propel the broad market to within striking distance of its highest level ever.

"You've got a real sea change in investor outlook," said Andrew Wilkinson, the chief economic strategist at Miller Tabak Associates.

While the rising market may lift the nation's collective spirits, it will not necessarily restore everyone's portfolios. In good times and bad, many individual investors tend to buy and sell at precisely the wrong moments. They dump stocks after the market falls and buy stocks after the market rises, the opposite of what investors are supposed to do.

Some market experts worry that might be happening this time, too. People who got out as stocks plummeted in 2008 and early 2009 have already missed a remarkable rally. The Standard & Poor's 500 stock index has soared 120 percent since March 2009, passing the 1,500 milestone and finishing just 5 percent shy of the record high of 1565.15 reached in 2007. This year alone, the main indexes are up 5 percent. Now, the investing public seems more afraid of missing out than of misreading Wall Street again.

Americans' latest stock-market romance is young, and it could easily fade before it becomes something more serious. Some market watchers warn that given the big run-up in prices, the market is ripe for at least a brief correction.

Still, the optimism that has pervaded the market in recent weeks is a drastic change from recent years. Until recently, many investors had continued to shy away from stocks in the face of a trio of hovering problems -- the potential breakdown of the eurozone, fears of a stalling Chinese economy and political brinkmanship in Washington that threatened to drive the economy into a new recession.

Fearsome threats are fading

One after another, these threats appear to have dissipated. This week Congress found at least a short-term way around the nation's debt ceiling, sidestepping Republican threats to let the government default when it reached a self-imposed borrowing limit in February or March.

As the fog of crisis has cleared, investors have more clearly focused on the cascade of good economic data pointing to a growing housing market, shrinking unemployment and corporate earnings that were stronger than expected.

"The last few weeks represent the belief that there will be no existential threat to any large global economy in 2013," said Nicholas Colas, chief market strategist at BNY ConvergEx group.

Jim Cole, a 52-year-old employee at the Bank of the West in San Francisco, had most of the money in his individual retirement account in cash at the end of 2012 as he awaited a bad outcome to the fiscal negotiations in Washington. Since Congress reached its agreement, he has put almost all of that money to work in stocks.

"I just bought some more stock this morning," Cole said Friday. "There doesn't seem to be this swirl of impending doom hanging over the U.S. economy or the world economy looking out six to 12 months from now."

A good run for the S&P

The optimism about the economy and corporate profits has helped fuel eight straight positive days for the S&P 500, the longest such run since 2004. The S&P 500 finished Friday up 8.14 points, or 0.5 percent, to 1,502.96.

The Dow Jones industrial average rose 70.65 points, or 0.5 percent, to 13,895.98, near its high. The technology-heavy Nasdaq composite index climbed 19.33 points, or 0.6 percent, to 3,149.71, still well below its peak in 2000.

In the past three weeks, market data company Lipper reported that $14.9 billion had gone into all stock-focused mutual funds, the most in any three-week period since 2001. Mutual funds focused specifically on U.S. stocks have collected $6.8 billion since the new year, the most in all but one comparable period since the financial crisis.

Even many optimistic strategists say that a short-term break from the market rally is likely until there are more indications that the economy is growing.

And given that January is historically a strong month for stocks, more bearish analysts have said the recent rally is likely to fade. One drag on growth could come from the recent increase in payroll taxes.

There is also a sizable contingent of investors that think the European debt crisis and U.S. fiscal position still represent significant threats.

But Russ Koesterich, the chief investment strategist at BlackRock, said the current threats were "mundane" in comparison to what investors faced over the past few years.

"We're not talking about big crises anymore," he said.

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