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Are Main Street investors warming up to stocks?

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The facade of the New York Stock Exchange.(Photo: Richard Drew, AP)

Story Highlights

  • With stocks nearing all-time highs, Main Street bullishness hits highest level in 2 years
  • One brokerage reports trades per day up 12% in January vs. last month
  • Money flows into stock funds resume but whether it lasts is under debate

With the broad U.S. stock market flirting with an all-time high four years after the worst stock plunge since the Great Depression, a slew of signs are emerging that suggest Main Street investors may be in the early stages of ending their self-imposed exile from the stock market.

While the stock market is still unlikely to win any popularity contests, incoming data and anecdotal evidence suggest retail investors are more bullish on stocks than they have been in years, less fearful of a market collapse, and warming up to the idea of putting their money at risk and investing again in mutual funds that own U.S. stocks.

"Is the retail investor back? Not fully. But they certainly are on the path to coming back," says Steve Quirk, senior vice president of TD Ameritrade's Trader Group. The discount brokerage's Investor Movement Index, he says, flashed scores this month indicating that investors exposure to the market is the highest it's been since early 2011.

On Thursday, the Wilshire 5000 stock index, the USA's broadest market gauge, which includes almost 3,700 stocks, briefly topped its Oct. 9, 2007, record high of 15,806.69 before closing 21 points shy of a historic peak. Since the bear market ended in March 2009, stocks have generated paper gains of nearly $11 trillion, says Wilshire Associates. The Dow Jones industrial average and Standard & Poor's 500 stock index are just 2.4% and 4.5% below their respective peaks.

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The big gains seem to have caught the attention of Main Street investors, many of whom have turned ultra-defensive with their investments since the 2008 financial crisis and sought comfort in more conservative, yet lower-yielding investments, such as cash and U.S. Treasury bonds.

The latest weekly sentiment survey released by the American Association of Individual Investors found 52.3% of investors were bullish, the highest reading since January 2011. A closely watched Wall Street "fear gauge" is trading at its lowest level since April 2007.

The combination of falling fear and rising bullishness has translated into retail investors putting some money to work in U.S. stock funds, after consistently yanking money out of these funds since the 2008 financial crisis. In the past two weeks, domestic stock mutual funds have enjoyed cash inflows of $11.3 billion, the best two weeks since April 2000, says fund-tracker Lipper.

In another sign that investors may be giving stocks a second chance, TD Ameritrade says it's averaging 370,000 average trades per day in January, up nearly 12% from 331,000 in December.

Efren Hernandez, 49, a government worker from Los Angeles, got back in the stock market this month after selling most of his stocks in 2007 and 2008. He sat out last year's rally, when stocks rose 13.4%, because he didn't believe in it. Now is a good time to invest, he says, citing an upturn in the economy.

"I've been in this rally," says Hernandez, adding that he bought diversified investments tied to major stock indexes.

Getting a new look

There are many theories as to why Main Street may be warming up to stocks after giving them such a chilly reception in recent years.

The fact that the market is up more than 120% since its March 2009 low is one reason, but not the only one, says Nicholas Sargen, chief investment officer at Fort Washington Investment Advisors. Investors are becoming more comfortable with stocks now that the fiscal cliff has been averted and political uncertainty has diminished.

People are also feeling more optimistic about their own economic status, thanks to a rebounding housing market, more jobs and greater stability in the economy. There is also less fear about major risks, such as Greece suffering an economic collapse or the U.S. defaulting on its debts. "People are feeling better," says Sargen.

The fact that the market's wild gyrations have calmed down, has also soothed investors' frayed nerves, analysts say. Last year, the Dow only had 29 days in which it suffered intra-day swings of 200 points or more, vs. 173 in 2008 during the financial crisis, says ScanShift.com. "Last year," says ScanShift Chairman Fane Lozman, "was the quietest year since 2006." So far in 2013, there has only been one day with an intraday range of more than 200 points.

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Joanne Mechling is another mom-and-pop investor getting a tad more aggressive.

Mechling, 47, a married market researcher with no kids from Portland, Ore., admits that the fear of missing out on gains has given her a new sense of urgency to get invested. With the market near a new high, "it's definitely safe to invest now," she says.

Mechling, a buy-and-hold investor with roughly $900,000 tied up in stocks, normally makes a full, lump-sum deposit to her and husband Scott Lee's IRA the first business day of the year. But this year, she held off, hoping for a market drop and cheaper prices before investing the couple's $12,000 annual contribution.

The drop never came. She finally capitulated and invested the IRA money Tuesday. Earning 0% in cash or less than 2% in a 10-year U.S. Treasury note, even for a just a few days, didn't add up.

"I felt if I waited any longer I would miss out on gains," says Mechling. "The market just keeps rising, and it seems like nothing is going to stop it."

The climb back to fresh highs is also getting investing novices involved for the very first time.

Verne Watley, 23, of Atlanta, has been watching the bull for more than a year and is eager to take part.

"I'm interested," says Watley, an Atlanta resident who is an aspiring songwriter currently in the military. "I've been paying attention to what's been going on." He plans to open a brokerage account so he can start making his first investments.

Watley didn't experience the pain of the stock market's brutal decline in 2008, and he doesn't see something like that repeating anytime soon. "I'm pretty optimistic about the whole thing," he says.

Some Wall Street pros say there are hints of a coming shift in the mind set of investors from defense to offense.

Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, is predicting a major shift away from so-called safe assets such as bonds and cash to risky assets such as stocks. He calls this shift, which he says is already underway and is powering the stock market to new highs, the "Great Rotation."

"Hello equities, goodbye bonds!" Hartnett wrote Thursday in a client report. "The Great Rotation has begun."

Not so fast ...

But just because there are growing signs that Main Street investors might be dipping their toes back in after years of viewing stocks as a can't-win investment, many Wall Street experts warn that it's far to early to declare that the individual investor is back in a big way.

"I would not call it a mad rush into stocks or a mad panic to buy, but it is a positive for the market to see retail investors returning," says David Brown, chief market strategist at Sabrient Systems.

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Not everyone's in. Many investors are still out of the market and plan on keeping it that way.

Tina Huston, 48, of Parker, Colo., still doesn't trust the market. Despite the powerful rally for stock indexes, she feels left out. She bought shares of iPad and iPhone maker Apple at $620 a share, and has ridden them down to $450.50 in the recent sell-off -- including Thursday's $63.51-a-share plunge.

Says Huston, a horse trainer and artist: "I'm still losing money on Apple and really can't afford to lose money," she told USA TODAY via e-mail. "It makes me wonder if there aren't other shenanigans going on. If that's the case, and there is no fair game, then why invest? I might as well go to Vegas and play the roulette wheel."

That attitude remains widespread, says Neil Hennessy, chief investment officer at Hennessy Funds.

"No, I still don't think the individual investor is in, and I don't think they will be for awhile," he says "People are still fixed on fear."

Analysts who track mutual fund flows also warn that it's way too early to say Main Street investors are back for good. While the massive back-to-back weekly inflows to U.S. stock funds are a step in the right direction, it's tough to say if the money will keep pouring in, says Matthew Lemieux, senior research analyst at Lipper.

He says fund flows often jump at the start of a year, when fresh money pours into the market as investors fund IRAs and put bonus money to work. It's not uncommon for investors to chase performance, either.

"My view is it is premature to pronounce this as the Great Rotation," says Lemieux. "I would say we are in the very early stages. The big inflows to open the year were the start of people opening their eyes to stocks and starting to think about whether they should start reallocating more money to stocks."

The big early-year rush into stock funds may simply be a rebound from massive outflows near the end of 2012 following the U.S. elections and uncertainty caused by the fight about the fiscal cliff, adds Brian Reid, chief economist at the Investment Company Institute, a fund company trade group. Now that the fiscal cliff has been averted, money that left the market is making its way back in.

What would convince Reid that Main Street stock investors are back for good?

"I would like to see the heavy cash inflow continue for several months," says Reid. "I don't see two weeks of inflows as clearing that hurdle"

Five signs that individual investors might be finally coming back to stocks:

1. Trading is up. Daily trades at TD Ameritrade have averaged 370,000 in January – up from 331,000 in December, according to TD Ameritrade.

2. Portfolios have been repaired. The Wilshire 5000, the broadest measure of the U.S. stock market, on Thursday crossed over its all-time high of 15,813.52, meaning that the nearly $11 trillion in stock market wealth lost in the bear market has now been restored.

3. Money is flowing to stock funds again. Net inflows to U.S. stock funds totaling $11.3 billion in the two weeks ended Jan. 16 were the best two weeks since April 2000, according to Lipper.

4. Optimism is rising. Bullishness reading of 52.3% the week ended Jan. 23 was the highest in two years, says American Association of Individual Investors.

5. Nervousness is down. The VIX, also known as the "fear gauge" on Wall Street, this week hit its lowest level since April 2007.

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