Monday, July 14, 2003

Investors are smiling for the first time in years when opening their financial statements this month, thanks to the best stock market performance since 1999.

“This was a nice quarter for me. I’m hoping this is just the beginning,” said Justin McCarthy, a lobbyist who has invested about 60 percent of his portfolio in health care. His latest statement showed the first encouraging results in three years.

The Standard & Poor’s 500 index has risen 26 percent since March, primarily from optimism that the economy and corporate profits will improve during the second half of the year.

Also fueling the rebound, now in its fifth month: the end of major combat in Iraq, the passage of investor-friendly tax legislation on Capitol Hill, and interest rates that have plunged to historic lows.

“For the investor who has 50 to 60 percent of their account in the equity markets, we are looking at very significant increases,” said Richard E. Cripps, chief market strategist for Legg Mason Inc., a Baltimore brokerage.

The S&P rally is “a welcome event by any standard,” Mr. Cripps said.

Thanks to the strong second-quarter performance, some investors appear ready to take a gamble on Wall Street.

Heather Dell, a sales executive at a Manhattan advertising firm, said she increased her 401(k) contributions in the past month, from 3 percent of her pretax income to 15 percent, and she is buying individual stocks again.

The brokerage operated by the Motley Fool Inc., an Alexandria investment-information firm, has experienced double-digit increases in customers in recent months, according to senior analyst Tom Jacobs. Clients also are asking more about Individual Retirement Accounts, he said.

“The downside is there are individual investors who aren’t that experienced who jump into the market at times of maximum enthusiasm and jump out at times of maximum frustration,” Mr. Jacobs said.

One Federal Reserve employee who did not want to be identified compared the market to gambling.

“One minute you’re up, the next you’re down,” she said. “It’s like blackjack. Sometimes you don’t know when to fold or to stick.”

Online broker Scottrade had its biggest day in history June 6, handling 106,000 trades. In the past month, Scottrade’s daily average was about 75,000 transactions, nearly three times the 28,562 traded per day during June last year.

“It is just a huge pickup in demand and a change in psychology that is different than I have seen before. It is just an extreme change in investor psychology,” said Rodger Riney, chief executive officer of Scottrade.

Some analysts say the second-quarter surge in stock performance was another short-term rally within an ongoing bear market. Other observers have suggested that investors simply are reinflating the tech bubble that burst in 2000.

Some investors are avoiding blue-chip stocks and pumping their money into tech stocks that sell from $7 to $10 a share, Mr. Cripps said. He said some investors have flocked to companies such as Level 3 Communications Inc., a Broomfield, Colo., fiber-optic business whose shares sell between $4 and $7.

But others say they have learned their lesson from the last tech bubble.

Paul Moses, an Ottowa salesman who attended a convention in the District yesterday, said he invests 5 percent of his portfolio in U.S. stocks, including health care. His portfolio has remained stable, partly because he avoided jumping on the technology bandwagon during the last boom.

“I diversified. I didn’t suffer as much as my friends,” Mr. Moses said.

The Nasdaq Composite Index, the star of the last bull market, is up a stunning 31 percent this year, although it still is down about 65 percent from its all-time high of 5,049, reached March 10, 2000.

The Dow Jones Industrial Average is up nearly 10 percent for the year, but it is down almost 22 percent from its record high of 11,723, which it hit Jan. 14, 2000.

Not everyone is celebrating the strong second-quarter results. Some investors pulled their money out of the market during the recession, choosing safer investments such as savings accounts and certificates of deposit.

“Their returns are dwindling because of the falling interest rates,” said Greg McBride, senior analyst for, a personal finance research Web site. The prime rate dropped to 4 percent after the Federal Reserve lowered interest rates a quarter-point last month.

Mr. Jacobs recommends that equity investors seek “well-managed businesses with attractive evaluations.” His favorite picks are small companies that produce healthy returns.

• This article is based in part on wire-service reports.

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