Is the Stock Market Safe?

 |  Includes: DIA, SPY
by: David Moenning

In a word, no. That’s the general consensus found in a survey of individual investors done by AP and CNBC this week. As if dealing with two major bear markets since the turn of the century wasn’t enough, all the talk about high frequency trading and the May 6th "Flash Crash" seems to have pushed individual investors over the edge in terms of their comfort level with the stock market. In fact, according to an AP/CNBC poll, 55% of those surveyed believe the stock market is fair only to some investors.

The bottom line of this particular survey is that investors are now wary about the idea of using the stock market as a way to invest for retirement. Instead, the survey found that the vast majority of individual investors continue to pump unprecedented amounts of money into what many believe is the most overvalued asset class on the planet – government bonds.

One result of the 10-plus year secular bear market in stocks is the gradual erosion of the public’s interest and confidence in stocks as an investment. Of course this HAS happened before. Anyone recall the 1982 cover of Time magazine with the title “The Death of Equities?”

Although the cyclical bull market that began in March 2009 remains intact, the public has been pulling money out of the market on a monthly basis. Since January 2008, the Investment Company Institute reports that a total of $244 billion has been withdrawn from US equity funds. Yet at the same time, a total of more than $589 billion has poured into US bond mutual funds, which is an unparalleled amount.

It appears that the "Flash Crash" may have been the straw that broke the camel’s back. For example, in the 11 weeks prior to May 6th the public pumped a strong $26.6 billion into equity mutual funds. This is hardly surprising since during that time the market was rising steadily and had gained more than 70% in the past 12 months.

However, in the 16 weeks since the "Flash Crash," investors have been running scared. In fact, Investment Company Institute reports that the public has pulled money out of US equity funds each and every week since, with cumulative withdrawals now totaling $55.9 billion.

Thus, it would appear that the market’s recent volatility has caused the investing public to lose confidence in the market. The AP/CNBC poll found that 61% of those surveyed felt the volatility has made them less confident about buying and selling stocks.

There is also a widespread perception is that the market is rigged or unfair to the little guy. Nearly 90% of the survey respondents whose portfolios are less than $50,000 said the market is unfair to small investors.

In addition, the public doesn’t seem to have much faith in the administration to fix the situation in the market. The poll found that just 8% expressed strong confidence in federal regulators while 50% expressed little-to-no confidence in those tasked with overseeing the markets.

Does this mean it is time to give up on the stock market as an investment vehicle? We would respond with a resounding “no!” The trick is to understand that the game has changed. After an 18-year bull market, the tide has turned. As such, investors actually have to do something besides putting money into any old mutual fund and closing their eyes.

Disclosure: No positions