What Happened To The ‘Stimmy’ Surge?

Conventional wisdom had it that once the new round of virus relief payments hit bank accounts, Americans would likely put at least a portion of the money into US stocks.

If they didn’t buy shares, they’d surely squander their stimulus on deep out-of-the-money call options, or “sophisticated scratch-off tickets,” as I refer to them.

The assumption that new “stimmy” would invariably find its way into the market was predicated on the idea that surging retail interest in equities and options during 2020 (and early 2021) was attributable to free money from the government.

That narrative is, at best, only partially true, and admits of innumerable caveats. There’s quite a bit of nuance to the debate around whether, and to what extent, stimulus checks were the primary driver of increased retail participation.

Read more:

Whither Your Stimmy, Good Sir?

Free Money And What To Do With It

A week on from the distribution of hundreds of billions in new “stimmy,” total call option volume is actually down from the highs seen in February.

This isn’t totally scientific, but it’s funny. As Bloomberg’s Vildana Hajric wrote, it “suggests vaccinated Americans are emerging from lockdowns ready to splurge on plane tickets instead of equities, in a warning sign for a bull market famously powered by the Robinhood crowd.”

So, the “stimmy” surge fell victim to plane tickets, apparently.

The visual (below) is a version of the figure Hajric used, and it purports to illustrate the point.

Bloomberg’s interpretation is probably too simplistic, but there’s doubtlessly some truth to it. “A decline in retail options sentiment has led to a decline in overall call option volumes,” Barclays’ Maneesh Deshpande wrote, in a note dated March 17.

Part of this may be due to recent stumbles in big-cap tech and other retail favorites which fell victim to the rates tantrum.

“As the recent selloff and rotation out of large-cap tech impacted ‘retail favorites’, retail sentiment has not rebounded strongly with the markets,” Deshpande went on to say, calling lower activity from retail investors “not surprising given that the ‘retail favorites’ names have been underperforming.”

Maybe it’s just me, but it sometimes feels like it’s difficult to discern what a “retail favorite” actually is. Over the past year, tales of retail investors gone mad (or otherwise run amok) have centered around everything from the FAAMG cohort to Hertz to GameStop.

Don’t misconstrue that. I’m sure there are analysts who spent quite a bit of time parsing Robinhood data and other relevant series in an effort to construct baskets and indices that accurately reflect retail investor preferences. And I’m confident those baskets do, in fact, represent retail sentiment with some respectable degree of accuracy.

My point is just that retail investors in our “new” Roaring 20s are a mercurial bunch. One day, they’re betting on a hodgepodge of bankruptcies and the next they’re colluding to engineer a gamma squeeze in mega-tech.

Meanwhile, Nomura’s Charlie McElligott on Tuesday reiterated that market participants are now finally considering the right tail again, after spending the majority of 2021 focused on the prospect of a downside crash.

“We now see SPX Call Skew jumping, with 3m Call Skew at 92%ile (2Y lookback), while 3m Put Skew is now down to 66%ile and sharply off recent highs,” he said, adding that the rationale is the same. It’s about “reopening ‘green shoots,’ stimulus distribution and $3 trillion in infrastructure passed via reconciliation.”

Still, McElligott noted that at the end of the day, “it will likely come down to Rate Vol,” which, in turn, will depend increasingly on market participants’ perception of impossible-to-parse macro data bedeviled by base effect distortions.