Is the Stock Market Dead? 'There Is No Trust Out There'

Armed with his sandpaper voice and a fire-and-brimstone preacher's zeal, David Darst bemoans the lack of investor confidence and participation in the stock market, and its ominous implications.

A trader takes a break outside of the NYSE.
Oliver Quillia for
A trader takes a break outside of the NYSE.

"They have lost faith and trust in politics," he begins at a speech delivered to hedge fund managers. "They have lost faith and trust in the political powers in Washington."

The loss of faith and trust, he says, extends beyond the stock marketto societal institutions all the way to religion.

But on this day, speaking to a few thousand fund pros at the Skybridge Alternatives, or SALT, conference in Las Vegas, the chief strategist at Morgan StanleySmith Barney is on hand not to talk about theology but about the religion of investing.

It is, he says to a hushed crowd that knows exactly what he's talking about, a faith that is losing converts every day.

"Your mission on this earth," Darst says in trying to simplify the equation, "is to determine price versus value."

Or at least that's the way it should be. Nowadays a financial adviser also has to convince investors that the stock market waters are calm and it's safe to go swimming again.

But the market is in a crisis marked more than anything by sheer apathy.

Even as major indexes like the Dow , Standard & Poor's 500 and Nasdaq reach post-financial crisis highs, they are doing so without the participation of mom-and-pop investors, who have been unabated in pulling money out of the stock market and putting it into low-yielding bonds, which have long been perceived as a safer and decidedly less glamorous choice.

At some point the question, then, has to be asked: Is the stock market dead?

Sure, dead may be an alarmist's exaggeration, but it's difficult not to worry about the health of an entity that has seen the life sapped of it since the onset of the financial crisis in 2008, a trend that has accelerated since the vaunted Flash Crash of two years ago.

Market volume is off fully 25 percent since electronic trading gizmos went berserk on May 6, 2010, sending the Dow plunging nearly a thousand points in a few minutes. Yet if you ask market insiders, most will wince when asked if the Flash Crash has led to the decrease in New York Stock Exchange trading activity and a coinciding escalation of public skepticism about the doings of Wall Street.

Darst, though, knows there's something out there.

He is a guest most Fridays on CNBC's "Closing Bell" show, trading market observations in a key far more reserved than the animated show he put on for the SALT crowd.

Instead of summoning a black car for the ride to the CNBC set, Darst takes the subway and gets off at Fulton Street, which is a short stroll away from the former Occupy Wall Streetencampment in Zuccotti Park, at Broadway and Liberty Street.

He used to wear a crisp three-piece suit with the sole purpose "to provoke them" and to engage in banter with the so-called 99 percenters, who profess to represent the Americans not included in the Wall Street and Washington ruling class.

"They have a point," Darst unexpectedly tells the hedge fund big-shots. Pausing for emphasis, he adds, "You know this."

He speaks of "societal disparity" and warns that Brazil is becoming more like what America used to be and America is becoming more like what Brazil used to be.

Even among the types of hardened market veterans that a hedge fund convention would be expected to draw, Darst's words draw vigorous nods of approval and repeated applause from his audience.

Outside the hall where he is speaking, his fellow financial professionals weigh his words and contemplate the future.

"There is no trust out there," says Gerald A. Barbara, a senior vice president in charge of alternative investment practices at U.S. Bancorp who thinks that stock investing still matters. "Once that comes back, everything will fall in line."

A colleague and fellow V.P., Mike Mohamadi, who manages the company's East Coast operations, thinks the lack of faith in the market is subject to circumstances beyond its control.

"It's Europe that's keeping fears going," he says. "Every day there's a new story out of Europe, and it's killing investor confidence."

"Investors are becoming very smart and learning this business," Barbara adds, in a comment that could be doing more harm to stocks than good.

For if investors are learning more, that education has taught them to flee the market.

Money market mutual funds, where investors typically park their money in times of duress before deciding where to deploy, has shrunk from just short of $4 trillion during the worst days of the financial crisis all the way down to $2.57 trillion, according to the Investment Company Institute.

But the lion's share of that money has gone not to stocks but to bonds. In the most recent week for which data is available, stock funds lost a stunning $5.3 billion while bond funds gained $7.5 billion.

All this, while the stock market has doubled gains off its March 2009 666 number-of-the-best intraday low.

Jeremy Siegel, the oft-quoted finance professor at Wharton, is befuddled by investors who would keep buying bonds instead of taking advantage of stock market gains.

Even a flat stock market, Siegel argues, gives investors a better return than bonds when factoring in dividends.

"How can people voluntarily give their money to the government and [say] 'give me no yield for 10 years and less money than I have now in terms of purchasing power?" Siegel says.

Indeed, Darst, in the face of his concern about the lack of faith in risk assets, tells his listeners to buy "global gorillas" such as McDonald's , Pfizer and Kraft Foods .

Regular investors, though? Darst thinks they're haunted by three "Ts": Trust, Transparency and Trauma. They lack trust, they want the market to have more transparency, and they're forever worried about the succession of trauma they have had to endure.

"This is a crisis not of the stock market," he bellows. "This is a crisis of legitimacy."