Free Money And What To Do With It

$1,400 stimulus checks are coming.

That’s good news for the 10 million Americans who had a job this time last year but don’t have one now.

It’s also good news for US equities to the extent a portion of the new direct payments finds its way into stocks.

I’m going to bury the lede here, so prepare yourselves for a tangent.

Regular readers know I’m not particularly fond of the suggestion that lower-income households short on necessities are predisposed to rolling the dice on GameStop or grabbing for tech upside via QQQ calls. The idea that single mothers or families experiencing food insecurity are opening brokerage accounts en masse in order to participate in a retail options mania (for example) is wildly ridiculous.

Crucially, that’s not to say stimulus money hasn’t leaked into markets. It clearly has. And it’s also not to suggest that in a perfect world, we shouldn’t endeavor to ensure that every dime of stimulus is directed to people who “really need it.” But that’s obviously impossible. Could we do a better job in that regard even outside of a perfect world? Well, probably. But outside the obvious (i.e., beyond setting an income threshold), every effort to “target” admits of a virtually infinite list of caveats and exceptions. Trying to address them all in legislation is a rabbit hole.

Beyond that, it’s not clear to me that most people are conceptualizing of this properly. Let’s take a closer look.

Does someone making $60,000 (or a family making $120,000) “need” another $1,400? No. Almost surely not, assuming that person (or that couple) still has the same job(s). However, that person (or couple) might well spend that $1,400 at restaurants and retail shops decimated by the pandemic. That spending supports jobs. And so on and so forth.

The reason we can say, definitively, that someone making $500,000 shouldn’t get a free $1,400 is precisely because that person was never constrained (financially speaking) in his or her capacity to make the kinds of discretionary purchases that drive economic activity. If that person wants to spend $1,400, she’s going to spend $1,400. Giving her another $1,400 isn’t going to mean the difference in buying three new pairs of shoes, three new outfits, and going out for a couple of nice dinners. She would have done that anyway. But it could make exactly that difference for someone making $60,000.

That’s the truth behind this debate. It’s not as much about determining the “need” threshold as it is about determining the marginal propensity to consume threshold.

That’s not an exact science either, but we can confidently say that someone making $75,000 or less or couples earning up to $150,000 (the thresholds for the stimulus checks) don’t have unlimited spending capacity. Could the people at the upper-end of that range save every penny of the stimulus? Well, sure. Will they? Probably not. They’ll buy something they wouldn’t have otherwise bought. You can almost guarantee it. And that’s really the point.

Ideally, we want to support the people who need the money and stimulate the economy at the same time in order to create jobs. You can’t really “stimulate” much if you’re just handing out $500 to people making, say, $30,000. They’ll spend it, yes. But what are they going to buy? In all likelihood, they’ll make one trip to Kroger, buy one pair of shoes for a child, and then maybe stop at Walmart on the way home. That’s about it. And that’s not really “stimulating” much.

With that out of the way, let’s briefly talk about stimulus and stocks — again. I say “again” because this discussion has become ubiquitous. The idea, generally speaking, is that the readily discernible uptick in retail investor activity is in part attributable to “free money,” and that that’s not always a good thing when that money is going into shares of bankrupt companies, or being used to drive up GameStop, or getting funneled into penny stocks.

It’s hard to argue with that assessment as stated. Then again, when is it ever a good idea for money to go into shares of bankrupt companies or get funneled into penny stocks? And is it really possible to isolate the effects of stimulus payments on retail investor activity versus the effects of stay-at-home mandates and the substitution of stock trading for sports gambling (which wasn’t possible when sports weren’t being played)? And further, once the retail mania kicked into high gear, how does one separate elevated retail activity that would naturally result from piqued interest triggered by the deluge of press coverage and the allure of ever higher stock prices, from retail activity solely attributable to stimulus payments or other kinds of government assistance?

Those questions aren’t easy to answer. But one way to go about answering them is to conduct surveys, which Deutsche Bank did this month. Specifically, the bank “conducted an online survey of 430 US users of online broker platforms from February 5-9.” In the note documenting the results, the bank said the survey was “broadly representative based on the US Census for this population across gender, age, income, region, and race/ethnicity.”

The findings help animate what the bank called “the 2020 retail wave.”

“More than half of all respondents raised their investments in stocks over the past year, with just under half (45%) investing for the very first time,” Deutsche wrote, adding that,

A large proportion of the new retail investors are under 34 years of age (61%), compared to a much smaller share (27%) of those that have been trading for longer. The new investor group has a much larger proportion of people employing some form of borrowing or leverage (26%) to invest in the stock market compared to those who had been investing 1-2 years (9%) or longer (3%). They are also much more likely to trade options frequently, with half (50%) of them trading more than 10 times a month compared to those who have traded for more than 2 years (19%). A significantly higher proportion (50%) rely heavily on social media to get trading ideas compared to older investors (8%); a larger proportion have also traded “meme” stocks.

None of that is what I would describe as “healthy,” but who am I (or you) to judge?

In a finding that speaks to the difficulty in parsing overlapping causality, Deutsche also noted that when asked what drivers motived them to invest more in stocks, a good return on investment topped the list at 42%. That was seven percentage points higher than the 35% who cited “having more cash in hand.” Indeed, a larger percentage (38%) cited having “more time to research and trade” than cited having spare funds. 35% (so, an equal percentage to those who cited having spare money) said they were driven by “the ease of trading from home” and more than a quarter mentioned the allure of commission free trades.

So, it’s not as simple as pointing to stimulus payments. Stimulus did play a part, but even that situation admits of more than a little nuance. For example, the proportion of survey participants who reported using their stimulus checks to invest in stocks was high across age, experience, and income cohorts. But Deutsche found that as a percentage of the total funds deployed, stimulus money played an almost negligible role, even among lower-income, young investors.

The figure on the left (above) suggests the notion that stimulus payments are directly responsible for the increased interest among retail investors in stocks is overstated, although I’d note that expectations of additional government support could influence decisions about how to allocate other sources of cash. For example, if you expect stocks to keep rising due to monetary policy or expect that fiscal policy will ensure the economy doesn’t fall into a black hole, you might be more inclined to allocate to risky assets.

The figure on the right (above) shows that going forward, investors do, in fact, intend to use stimulus money for investing purposes. “Survey respondents plan to put a large chunk (37%) of any forthcoming stimulus directly into equities,” Deutsche Bank wrote, adding that “with potential direct stimulus payments of $465 billion being planned, this could represent a sizable inflow into equities” of around $170 billion.

The survey contains a number of additional noteworthy findings. For example, 59% of respondents reported being employed full time. If you count full time, part time, self-employed and retired, the proportion is 85%. In other words, America doesn’t have an epidemic of jobless freeloaders using unemployment benefits and stimulus checks to launch careers as day-traders, according to this survey anyway.

Overall, the survey tells us that yes, stimulus money was used to buy stocks. And yes, the next round of stimulus will prompt more stock-buying. Also, yes, increased retail investor activity over the past year was driven in part by new investors, young investors, and investors predisposed to “meme” stocks and getting their financial “advice” from social media.

On the other hand, the survey suggests that no, stimulus money was not the primary source of funds. And while 20% said they “reduced spending” in order to buy stocks, it’s hard to separate that from decreased opportunities to spend. If the places you once spent money at are all closed, you can’t, by definition, spend money there anymore.

While investor behavior and attitudes varied across cohorts, Deutsche noted that “retail sentiment remains positive across the board” and that the constructive “take is widespread across all age and income groups, and regardless of when the investor began trading.” In other words, everyone is bullish.

At the end of the day, what I wonder is if any of this is going to matter. Will we look up this time next year and find that the share of corporate equities held by the top 10% of Americans has materially decreased? I seriously doubt it. Indeed, given the current distribution, such an outcome may as well be a mathematical impossibility.