Americans seem to be falling in love with stocks all over again.
After millions of people all but abandoned the market following the 2008 bust, individual investors are pouring money into stock mutual funds like they haven't in years. The flood, fueled by fading economic threats and better news on housing and jobs, has helped propel the broad market to within a few good days 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 won't 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 exact 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, closed Friday above 1,500 and was just 5 percent shy of the record high of 1565.15 hit 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 only a few weeks old, and it could easily fade before it becomes something more serious. Indeed, 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 marked change from recent years. Until very recently, many investors of all stripes 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 recession.
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 of allowing the government to default on its debt when it reached a self-imposed borrowing limit in February or March.
As the fog of crisis has cleared, investors have been able to more clearly focus on the cascade of good economic data pointing to a growing housing market, a shrinking unemployment problem, and stronger than expected corporate earnings.
"The last few weeks represent the belief that there will be no existential threat to any large global economy in 2013," said Nicolas Colas, chief market strategist at BNY ConvergEx group.
The level of bullishness among small investors has nearly doubled just since mid-November, according to a weekly survey conducted by the American Association of Individual Investors.
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."
The optimism about the economy and corporate profits has helped fuel eight straight positive days for the Standard & Poor's 500, the longest such run since 2004. That is despite a downturn for one of the most valuable and widely owned stocks, Apple, which fell 11 percent this week after the company cautioned analysts about its future growth.
The benchmark index 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. That is a couple of hundred points shy of the all-time high of 14,164.53 hit on Oct. 9, 2007.
The technology-heavy Nasdaq composite index is still significantly below the peak of 5,048.62 hit in March 2000. On Friday, the index climbed 19.33 points, or 0.6 percent, to 3,149.71.
Similar gains have been seen in many markets around the world. Since the beginning of the year, leading indexes are up 6.7 percent in Britain, 3.8 percent in France and 5.1 percent in Japan.
In the last three weeks, a total of $14.9 billion has gone into all stock-focused mutual funds, the most in any three-week period since 2001, according to the market data company Lipper. Mutual funds focused specifically on American stocks have collected $6.8 billion since the new year, the most in all but one comparable period since the financial crisis.
This comes after investors removed $416 billion from stock-focused mutual funds since the financial crisis began, according to Lipper. Those outflows continued even as the market climbed over the last few years. Last year, when the broad U.S. stock market rose more than 10 percent, money exited mutual funds focused on U.S. stocks in every single month.
Many retail investors leaving stocks have put their money into bonds, which have historically been less risky. There is now concern that those people could face losses if a rising stock market pushes up interest rates, which would make current bond holdings less valuable.
Since the market bottomed out in March 2009, professional investors have bid up the price of U.S. stocks partially in response to bumper profits at U.S. companies. The Federal Reserve has also tried to encourage investors to move into riskier assets like stocks by pushing interest rates lower, which makes bank deposits and bonds less attractive.
But many investors have been hesitant about entering the market due to the slow recovery of the real economy.
Now, a number of recent data points suggest that the recovery may be gaining traction. The number of new claims for unemployment benefits fell to the lowest level in five years this week, and an important index of manufacturing growth ticked up for the fourth straight month. New-home sales rose 20 percent in 2012, the government said Friday, the largest annual gain since 1983. But it was also the third-slowest year in terms of the number of new-home sales since the government began tracking the number in 1963.
Meanwhile, the president of the European Central Bank, Mario Draghi, said he expects European economies to begin to grow this year. Draghi took aggressive measures last summer that are widely credited with stemming the continent's debt crisis.
Even many optimistic strategists say that given how far and fast stocks have risen in recent weeks, a short-term break 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 seasonal and likely to fade quickly as the year goes on. One drag could come from the recent increase in payroll taxes, which is expected to show up in consumer spending in the first half of the year.
There is also a sizable contingent of investors who think the European debt crisis and U.S. fiscal position still represent significant threats to the economy and markets. Congress voted to put off the debt-limit only until May, at which point the U.S. government could again face the prospect of defaulting. In the meantime, billions of dollars in cuts to military spending and other government programs -- the sequester -- are set to start in March unless there is some agreement.
But Russ Koesterich, the chief investment officer at BlackRock, said the current threats are "mundane" in comparison to what investors have faced over the past few years. "We're not talking about big crises anymore," Koesterich said.