A More Cautious Little Guy Is Being Lured Back to Wall Street

The little guy is back on Wall Street. But will he stick around?

Many individual investors sat out the early phase of the stock market’s spring rally, but they’re losing their inhibitions as shares continue to climb, new data from online brokerages show.

Charles Schwab Corp. said Tuesday that average daily volume of commission-generating trades jumped 20% in May from April, to about 144,000, and rose another 20% in the first half of June, to about 172,000.

The June pace, if sustained, would be Schwab’s best trading month since September 2001.

The worst bear market in a generation raised fears that small investors might swear off stocks for good. But the market’s continuing surge is drawing more people back to equities.

Among them is Jane A. Brookes-Smith, a paralegal for Wells Fargo & Co. in Los Angeles. She raised her 401(k) retirement plan contribution a few weeks ago to 10% of pay from 6%, she said.

“I noticed the stock market was going up every day,” Brookes-Smith said. Her 401(k) is in stock and bond mutual funds as well in Wells Fargo shares, which have jumped 17% since mid-March.

“Now that I’m seeing the upturn, I feel positive again,” said Brookes-Smith. “I feel like the economy might be slowly mending itself.”

But the market’s advance, which since March 11 has lifted the blue-chip Dow Jones industrial average nearly 1,800 points, or 24%, to 9,323.02 as of Tuesday, still faces many skeptics among individual investors.

“The market has a positive tone, but a lot of investors are cautious about the sustainability of the rally, thinking this could be another head fake,” said Todd Halky, an analyst at Putnam Lovell NBF in New York.

Gary Kilner, an architect from Valencia, said he was keeping his cash in certificates of deposit, bank savings and money market accounts for the foreseeable future.

“This is another suckers’ rally,” said Kilner, taking a lunch break on Bunker Hill in downtown Los Angeles.

“Having been stung once, I’m not a glutton for punishment,” he said, noting that technology stocks have staged several strong but ill-fated rallies since the Nasdaq composite index peaked at 5,048 in spring 2000. Even with this year’s 25% gain, Nasdaq has returned to only 1,668.44 as of Tuesday.

“In 2000, all the ‘brilliant’ analysts were forecasting that the downturn was over,” Kilner said. Given today’s economic and geopolitical uncertainties, “I would think twice about getting back into the stock market. There is too much that can go wrong.”

Schwab’s chief financial officer, Christopher Dodds, said he shared the concern that investors might quickly turn their backs on stocks again if prices reverse course.

Schwab on Tuesday raised its earnings guidance for the current quarter, but the San Francisco-based brokerage said it remained guarded in its outlook for the rest of 2003.

“After the severity of the downturn we’ve all been through, it’s premature to declare that the individual investor is back,” Dodds said.

Even so, he said, “We’re encouraged,” noting that along with the trading uptick in individual stocks, Schwab investors have been much more aggressive in their purchases of stock mutual funds via the brokerage.

Dodds said Schwab probably would beat analysts’ average earnings estimate for the current quarter, now 7 cents a share, by 1 to 2 cents. The company’s stock closed unchanged at $11.34 on the New York Stock Exchange on Tuesday. It has soared 73% since mid-March but traded as high as $51 in 1999.

One big question on Wall Street is whether the latest buying wave has been led by investors who are buy-and-hold-oriented or by traders who are looking for a quick buck. Some data suggest that, among individual investors, the traders have been in the vanguard -- which may raise the risk that they could cash out in a hurry if the market turns down.

Schwab said that “active” traders, whom the brokerage defines as those who typically make 24 or more transactions a year, increased their activity by 24% last month at the firm, versus a rise of 16% in transactions by less-active investors.

“So far, it’s mainly the momentum player, the guy who shouldn’t be trading at the office but is,” Halky said.

Schwab online rivals Ameritrade Holding Corp. and TD Waterhouse, both of which cater to active investors, are getting more of a trading boost from the rally, analysts said.

Ameritrade’s daily trading volume climbed 27% in May, and TD Waterhouse’s rose 23%, Halky said. Both reported a further 25% rise in trading for early June.

Of course, many individuals continue to take a long-term approach toward investing.

George Johnson, a deputy director of facilities projects for the Los Angeles Unified School District, said he bought shares of Walt Disney Co. and Wal-Mart Stores Inc. earlier this year.

“I would probably hang on to them for long-term growth,” Johnson said. “I’m in it for the next 10 to 15 years.”