A quick scan of social media (and a “quick” scan is all I can subject myself to while retaining a modicum of sanity) suggests Americans have already begun receiving stimulus payments from Joe Biden’s just-passed $1.9 trillion relief bill.
In a testament to the notion that the US is a country of instant gratifiers, those who haven’t yet received their payments appear to be clamoring for them, despite the ink being barely dry on the legislation. Some folks on social media seem especially irritable about the notion that they may have to wait until mid-week for the credited funds to be available.
I realize the above will elicit some chuckles from readers, and I did mean for it to be at least a little bit humorous. At the same time, we should all remember that for every day-trader planning to plow their stimulus into shares of GameStop, there’s a single mother planning to spend her check at the grocery store. For every family poised to save a check they don’t need, there’s a father who lost his job in 2020 anxiously awaiting a direct deposit so he can catch up on a mountain of late bills.
You often hear the numbers bandied about, but it’s worth refreshing the figure (below) just so folks have a visual point of reference. The US labor market is nowhere near healed (orange bar).
As far as stimulus payments and US equities are concerned, if stocks rise, the financial media will relentlessly stalk recipients for “evidence” (read: confirmation bias) that direct payments are behind the latest leg higher for an already expensive market. If stocks don’t rise, it’ll be blamed on quarter-end rebalancing and some version of Ricardian equivalence, even as the vast majority of journalists won’t realize they’re leaning on one of the shakiest of all economic crutches to make the case.
Recall that, according to a widely-cited Deutsche Bank poll, the “retail wave” since the March 2020 lows was not primarily driven by stimulus money.
For lack of a euphemistic way to say it, that survey has been selectively reported on and otherwise cherry-picked by various portals with the sole intent of painting a misleading picture. I covered it objectively in “Free Money And What To Do With It.” I’d recommend anyone interested read that article (especially with stimulus checks now hitting bank accounts), but the excerpt below is a direct quote from Deutsche Bank’s survey:
A vast majority (72%) of the respondents reported getting a stimulus payment and more than half (53%) said they invested some of the stimulus money in the stock market. But in terms of the overall funds invested into the stock market, only a small share (8%) of overall investments look to have come from stimulus checks. Instead, the vast majority of funds were sourced from existing cash savings (34%), rotating investments out of other asset classes (11%) or by reducing spending (20%). What will they do with new stimulus checks? Survey respondents plan to put a large chunk (37%) of any forthcoming stimulus directly into equities. With potential direct stimulus payments of $465 billion being planned, this could represent a sizable inflow into equities ($170bn).
Generally speaking, media outlets and other portals masquerading as such, gave short shrift to the nuance. Namely, they failed to emphasize the 8% figure, which is obviously key.
Deutsche’s survey did, of course, indicate that a substantial percentage of new stimulus money could find its way into equities. And, if you read the linked article (above), you’ll discover that I explored every angle of this debate at length. For our purposes here, I wanted to highlight (again) the relevant charts (below).
The point, in case it’s unclear, is that the truth is usually somewhere in the middle. Retail investors’ interest in the stock market last year and early in 2021 (as manifested in “meme stocks” and options behavior, for instance) was not primarily due to the distribution of $1,800 (the sum of the individual payment amounts for the first two rounds of stimulus checks).
Sure, that money played a role. But so did a laundry list of other glaringly obvious factors.
Going forward, I suppose I’d just note two things as lower- and middle-income Americans receive a third batch of direct payments.
First, it isn’t clear to me that any of the possible outcomes for that money are “bad.” Yes, it would be “bad” if the money was squandered on alcohol or OTM call options on the latest Reddit craze. But it’s impossible to control for that ahead of time.
From a 30,000-foot perspective, the money will be i) spent, ii) saved, or iii) invested. We know Americans don’t save enough. Everyone has heard some version of the statistic that says most families couldn’t cobble together $400 in cash for an emergency. When it comes to investing, stock ownership is still overwhelmingly concentrated in the hands of the wealthy. The top 10% of Americans own 88% of stocks (figure below).
Can nobody else have any? Is the prospect of a family making, say, $110,000, getting a free $3,000 to potentially invest in an index fund or a retirement account just too much for a family making $500,000 to stomach? Is that too onerous an encroachment by the (relative) underclass? Is it just a small step from that to a peasant revolt?
If you ask me, it won’t be the worst thing in the world if some of the money is saved or wisely invested.
Second, the notion that Americans won’t spend the money because they read a headline about higher taxes isn’t realistic. One thing that’s missing from public discourse is the simple observation that in order for citizens to, for example, eschew the tendency to spend free money now because it will “invariably” be taxed back from them later, the populace has to be some semblance of forward-looking and educated.
As someone who’s watched, first-hand, the decline of America’s public education system, allow me to say, definitively, that it’s ludicrous to suggest that a large percentage of US citizens receiving stimulus checks will save them based solely on careful consideration about the likely course of tax policy or government finance.
So, again, this money will be spent, saved, or invested, probably in that order. It’s not obvious why any of those outcomes are bad.