Is the Stock Market Trustworthy?

Are the people and institutions of Wall Street worthy of being trusted? Do you care?
To see the general relationship between trust and stock investing, see my post about trusting the stock market. There are two aspects to having trust in the stock market. The first is the characteristics of the stock market. Are the people, institutions, processes, and history of the stock market worthy of trust? The second is how trusting are you? This posting deals with the market's characteristics. Go here for a discussion on your capacity to trust the market.

Wall Street can earn or destroy our confidence through both stock market performance and ethical behavior. Both are important. The news of disappointing behavior on Wall Street has been ongoing lately. Investment banks have gotten into financial trouble and have even failed. Commercial banks have needed to be rescued. And most recently, Bernard Madoff perpetrated a $50 billion Ponzi scheme, thought to be the largest ever. The investment industry has given us a lot to be mistrustful about. However, performance likely drives trust at least as much as unethical behavior. This is because we seem to be more forgiving when we are making money. When we start losing money, we become outraged at unethical behavior.

Consider the mutual fund scandals (late trading and market timing) that became public in September of 2003. This was quite unethical behavior by an industry that had been very clean of scandal. However, investors continued to pour money into stock mutual funds. The invested $17 billion in September and $25 and $15 billion in October and November. Why didn't this unethical behavior ruin the trust of investors? I believe that it was because the stock market was performing well. The Dow Jones Industrial Average was up nearly 13% for the year when news of the scandals hit. The market then earned another 11% through the end of the year. While these scandals were big news, they didn't seem to deter investment.

During the current problems in the investment industry, the stock market has been awful. The stock market is likely to end 2008 with a loss of more than one third of its previous value. During the months of July through October, investors pulled over $175 billion out of stock mutual funds. People receiving their annual investment statements from their 401(k) plan, mutual funds, and brokerages are going to be shocked if they have not been following the market news. This may ruin their trust.

Do you trust Wall Street? If not, is it their behavior or the stock market's performance that concerns you more?