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

That was a headline of a CNBC article Friday. It's the kind of attention-grabber you can't avoid clicking on. The stock market dead? I invest in the stock market. I'd rather nothing die on my watch.

The article quotes a few analysts who prove there's still a raging bull market -- in hyperbole. Investors are scared. They have no faith. No hope. "There is no trust out there," one says. "Once that comes back, everything will fall in line."

And even though stocks have rallied for three years, they've done 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," the article states.

"This is a crisis not of the stock market," says the final line. "This is a crisis of legitimacy."

Lots of hyperbole, but very few facts.

Let's ask a simple question: Objectively -- not anecdotally -- have investors been scared out of the stock market?

The Federal Reserve tracks the amount of stocks and mutual funds owned by U.S. households. Adjust that data for inflation, and you get this:

Source: Federal Reserve, author's calculations.

No big exodus. Adjusted for inflation, Americans own more stocks today than they did in 1998, when the bull-market frenzy really went into high gear, and just 9.5% less than at the peak of the dot-com boom in 2000. Yes, you could also call that 12 years of no growth. But as I've shown before, the reason stocks performed poorly over the last decade is that returns that should have been spread out over 15 years or more were compressed into about three, from 1996-1999. There hasn't been growth in Americans' stock holdings since 2000, but that's exactly what you should expect after a bubble.

Furthermore, a Gallup poll conducted for more than a decade shows the percentage of Americans with stock market investments has strayed by only a few percentage points from the survey's margin of error (it's hardly changed, in other words). In 1999, 58% of American households reported owning stocks, according to Gallup. In 2011, 54% did. The margin of error in any year is plus or minus 4%. Again, no big exodus.

And that's what we discovered last year when we asked some of the world's biggest brokers what their clients were doing. At the Vanguard Group, 98% of investors didn't make a single change to their retirement portfolios last summer, when market volatility peaked. "Ninety-eight percent took the long-term view," wrote Steve Utkus, who oversees the Vanguard Center for Retirement Research. "Those trading are a very small subset of investors." Throughout the entire financial crisis, only 3% of Vanguard investors cashed out entirely. E*TRADE (Nasdaq: ETFC  ) added a net 95,000 brokerage accounts in the year ended March 31. TD AMERITRADE (NYSE: AMTD  ) added 150,000. Margin debt at Interactive Brokers (Nasdaq: IBKR  ) has increased 367% over the last three years, according to The Wall Street Journal. "Traders sat out for a while. Now they are saying, 'It's time to return,'" the Journal quotes the company's vice president as saying.

And nationwide retirement assets are at an all-time high, if you're wondering.

In a way, that's unfortunate. Investors should want everyone else to give up, throw in the towel, and vow never to return. That's when the bargains arrive. "Volatility scares enough people out of the market to generate superior returns for those who stay in," Wharton professor Jeremy Siegel said last year.

But let's make something clear: Volatility hasn't scared a lot of people out of the market. Less hyperbole, more numbers, and we're all better off.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. Motley Fool newsletter services have recommended buying shares of Interactive Brokers Group and TD AMERITRADE Holding. Motley Fool newsletter services have recommended creating a bull put spread position in TD AMERITRADE Holding. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (4) | Recommend This Article (22)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 15, 2012, at 3:32 PM, NightBengal wrote:

    Hate to say, that's what I've come to expect out of the CNBC Broad-Brush team. That's part of why it would be very easy for me to pass over that article.

    All the same, good analysis as usual, Morgan.

  • Report this Comment On May 15, 2012, at 6:36 PM, Realexpectations wrote:

    I like to watch cnbc, I think its fun (I feel like such a nerd lol)

    But I hate cnbc at the same time

    they hardly ever talk about the same things as fool

    They say if you going to INVEST in stock X better get out when it reaches X dollars.

    David and Tom always say, that's not investing, that a way to lose all of your money.

    At least it seems.

  • Report this Comment On May 17, 2012, at 7:21 PM, minnjim1 wrote:

    Well, I'm scared out of the market, not because of volatility but because of (1) all the proprietary trading, (2) hedge fund shenanigans, and (3) microsecond trading that makes up most of the market volume. This is no longer a market of individual investors, it's a market of big players. I feel like a mouse in the elephant house. Yikes!

  • Report this Comment On May 31, 2012, at 12:31 AM, thidmark wrote:

    Are those stock mutual funds? Stocks and mutual funds doesn't tell me anything. There are all kinds of mutual funds.

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