Investors feel high anxiety over rally

Dania Leon’s portfolio has surged 55% during the stock market’s booming rally over the six last months -- and she couldn’t be more nervous.

After suffering deep losses last year, the 41-year-old Pasadena resident is grateful to recoup some of her money. But she fears that stock prices have shot up far more than is warranted given the country’s still-weak economy and nearly double-digit unemployment rate.

“I’m scared, I’m scared, I’m scared,” Leon said. “Why are we up, especially with unemployment as high as it is? I don’t feel great because I worry that we could have a 500- or 600-point drop in a day and I won’t be quick enough to pull out of it in time.”

Propelled by growing faith that the global economy has stopped contracting, this year’s stock surge comes as an enormous relief after the brutal sell-off during the financial crisis -- and it shows no sign of letting up.


Yet it’s also one of the least joyous bull runs in memory, as individual investors still smarting from last year’s devastation in their mutual funds and 401(k) accounts fear that the advance could give way to another free fall.

“I see a lot of nervousness,” said Wade Cooperman, chief executive of online brokerage TradeMonster. “It’s not that long ago that some people rode [the market] right down to the bottom.”

After jumping 108.30 points, or 1.1%, on Wednesday to 9,791.71, the Dow Jones industrial average is up 5.5% in just the last two weeks.

The blue-chip index has risen a stunning 50% since hitting a 12-year low in early March and is just about 200 points shy of 10,000, a mark that six months ago few expected to see any time soon.

Market optimists say stocks are responding as they always do to increasing evidence that the economy is coming out of recession, which should fuel a revival in corporate earnings. On Tuesday, Federal Reserve Chairman Ben S. Bernanke reinforced that sentiment by declaring that the recession was “very likely over.”

What has stunned many Wall Street veterans, however, is how relentless the rally has been since March, particularly given that most economists believe that any recovery will be weak at best and therefore tenuous.

But investors have been undeterred. Key stock indexes have yet to be hit by a meaningful “correction” -- a normal 10% to 15% pullback within a rising market.

Such retreats are considered an essential part of longer-term bull markets because they give the economy time to catch up with investors’ expectations. Often triggered by investors taking some of their profits off the table, corrections also allow people who missed the initial surge to jump in.


But potential buyers looking for such an opening in this rally have been stymied.

“People say, ‘I’m waiting, waiting, waiting for a pullback, but it doesn’t happen,’ ” said Nick Sargen, chief investment officer at Cincinnati-based Fort Washington Investment Advisors, which manages about $30 billion in assets for its clients.

“This market continues to baffle everybody,” said Ryan Larson, a trader at Voyageur Asset Management in Chicago.

The lack of a significant interruption in the march upward worries Keith Murphy.


During the market’s plunge last year and early this year, the Foothill Ranch mortgage advisor resisted the urge to unload his stock holdings, which are currently worth about $500,000. But now that things are looking up, he’s wondering if it’s time to sell.

“Every single day I get ready to click the sell button and pull my chips off the table,” Murphy said. “It’s confusing, and I’m afraid of what to do and afraid we could be in a bubble. The market’s looking floppy, and the reasons for growth don’t make sense.”

Such fears are understandable, said Terry Odean, an expert in investor behavior at UC Berkeley.

“You got whacked on the upside of your head last year, and you’re looking over your shoulder to see if it’s coming again,” Odean said.


The rally also is stirring high anxiety among people who sold stocks during the downturn and have been sitting out, too fearful to take a chance in the market.

“They’ve been traumatized twice,” said Michal Strahilevitz, a business professor at Golden Gate University in San Francisco who studies the psychology of individual investors. “First they lost a lot and got out. And now they’ve watched it climb up. It’s a lot of regret, and for people who are investing for their family, it’s a lot of guilt.”

There may be some solace in knowing that many professional forecasters have gotten it wrong too. Coming into September, warnings were everywhere that a sell-off was imminent. Classic measures of market sentiment were strongly bullish, which often signals at least a short-term top in share prices. History also was against the market: Over the last 50 years, September has been the weakest month of the year for stocks.

But Wall Street has kept focusing on the economy, which may not feel good to many people but still looks good to investors who just wanted to know that the recession has ended. Most economic reports this month have either beaten or matched analysts’ expectations.


What’s more, market bulls note that although stocks are up sharply since March, they remain far below their highs. The Dow still is off more than 4,300 points, or 31%, from its October 2007 record of 14,164.

Ned Davis Research, a well-known market research firm in Venice, Fla., correctly called the rally earlier this year and has maintained the view that stocks are going higher.

“So much money has been sitting on the sidelines and now is looking for a place to go” as confidence in a recovery rises, said Tim Hayes, the firm’s chief investment strategist. But he conceded a pullback was likely.

“We probably will get a decent correction at some point” in the near future, Hayes said. “But we’re not going to try to time that.”


Experts note that the rebound in stock prices -- and in other risky investments -- has been a global affair, not just a Wall Street phenomenon.

Since Jan. 1, a Bloomberg index of 500 European blue-chip stocks is up 20%, compared with an 18% rise for the U.S. Standard & Poor’s 500 index. Brazil’s market is up 61%. Russia’s has soared 96%.

Investors also have poured money into corporate and municipal bonds, driving their prices up. Many commodities, including copper, sugar and gold, also have rallied.

By pledging repeatedly to keep short-term interest rates near zero indefinitely -- to help the economy and the banking system -- the Federal Reserve has driven some investors out of havens such as money market mutual funds, which now pay next to nothing. The average annualized yield on money funds is a mere 0.06%.


Since mid-January, $403 billion has flowed out of money funds. But the funds still hold $3.45 trillion.

“The question people have to ask is ‘Am I so scared that I’m going to keep money in cash earning zero, rather than put it in the stock market?’ ” Sargen of Fort Washington Investment Advisors said.

Of course, financial advisors say money that you can’t afford to lose should never be invested in stocks. That was the lesson too many people learned the hard way in the crash of last fall and winter.

Anthony Costantino, who lives in downtown L.A. and works in the billing department of a nonprofit organization, just opened an account that he plans to fill with technology stocks at a clip of $500 a month. He knows he’s missed the rally since March but believes a bigger surge lies ahead.


“We’ve seen a stabilization, and it seems the worst is over,” Constantino, 32, said of the economy. “A lot of people say it’s better to buy on the upswing, even if you’re a little late. It took this long for me to see how things were going to be.”