Abraham Sanchez knew exactly how he wanted to spend his stimulus check.
Like millions of Americans, he had begun dabbling in the stock market during the pandemic. So, soon after US$1,400 from the federal government landed in his bank account last week, Mr. Sanchez, a 28-year-old trumpet player in Sacramento, Calif., moved all but US$200 of it into his Robinhood online trading account. He then used most of it to buy 80 shares of AMC Entertainment Holdings Inc., the struggling movie-theatre chain.
“I was like, ‘You know what? Whatever. I’ll give it a shot,’ ” he said. When the stock rose last week after AMC announced it was preparing to reopen theaters in California, Mr. Sanchez gained US$170 on paper. “It was kind of nice,” he said. The shares have since fallen, but he is still sitting on a paper profit of about US$120 and does not plan to sell.
Mr. Sanchez is by no means wealthy. While the pandemic halved what he used to make from his gig in a brass band, he gets by because of his day job as a store manager. He worries that the pandemic might flare up again or cost him his job. But Mr. Sanchez, who lives with three roommates, did not need the stimulus money to make ends meet. So he was willing to gamble.
“If I were to lose a good sum of money, it wouldn’t be good,” Mr. Sanchez said. “But I’m willing to take the risk, you know, if it can put me ahead for the next couple of months.”
The speculative appetite of small investors such as Mr. Sanchez may seem at odds with an economy still reeling from a pandemic that has killed more than a half-million Americans, decimated jobs and snuffed out businesses and livelihoods. But one of the biggest tools deployed by the U.S. government to cushion the economic blow — stimulus payments — is also driving a huge surge in investing by small traders.
Analysts at Deutsche Bank recently estimated that as much as US$170-billion from the latest round of stimulus payments could flow into the stock market. They conducted a survey of retail traders in which respondents said they planned to put roughly 40 per cent of any payment they received — or US$2 of every US$5 — into the stock market. Traders between the ages of 25 and 34 said they expected to put half of their stimulus check into stocks.
“That could lead to a bit more mania, speculation in the market,” said Patrick Fruzzetti, managing director and partner at Hightower Advisors, an investment firm. The “stimmies,” he said — using a popular online term for stimulus checks — will go into people’s trading accounts, and “they will trade.”
For a decade before the pandemic, small investors accounted for roughly one-10th of trading activity in the stock market. But in the past year, they have become responsible for close to one-quarter, according to Goldman Sachs analysts.
Individual traders were behind the sudden surge this year in the value of GameStop Corp., a troubled video-game retailer, which forced some big Wall Street traders into losses. Their trading helped push the S&P 500 index up nearly 80 per cent since it hit bottom last March. They have even driven up the price of bitcoin and other cryptocurrencies.
All told, the federal government has doled out as much as US$3,200 in direct payments to individuals who meet the criteria for stimulus money, starting with US$1,200 checks as part of the CARES Act last April. Those payments helped many people stay afloat, but they also padded the incomes of some who never lost their jobs or their savings. And with travel halted, restaurants shut and normal activity nearly at a standstill, the stock market got a big cut of the money intended to restart the economy.
The willingness of millions of Americans to use emergency federal assistance as play money for speculation speaks to the unique nature of the current economic downturn and the government response to it.
While about nine million jobs have disappeared since the onset of the pandemic, those losses have been unevenly distributed. Low-paying industries such as bars, restaurants and tourism, which depend on large gatherings, have borne the brunt, while well-paying jobs in the professional-services sector have been resilient as people switched to working from home.
In the interest of speed, however, the federal rounds of assistance have been aimed broadly, distinguishing little between those who have lost jobs and those who remain financially healthy. The result is that, as a whole, the American public has rarely been more financially secure. Between April and January, government transfers exceeded wage and income loss by about US$800-billion, according to Fitch Ratings, leading to a boom in savings.
“I cannot stress enough how unusual this recession has been,” said Vincent Deluard, global macro strategist at StoneX, a brokerage firm. “This is the first recession in the history of mankind where people have gotten significantly richer than they had been at the beginning of the recession.”
Typically, during economic downturns, people cling to cash, cut spending on non-essentials and hunker down until there are signs of a recovery. Stock prices usually suffer. During the 2008 financial crisis, for example, the S&P 500 collapsed nearly 57 per cent from its peak to its March, 2009, nadir. It took four years for the index to return to its previous peak.
The current crisis started this way, too. In February and March last year, the S&P 500 plunged nearly 34 per cent as panicked investors sold shares. The market began reversing course in late March after the Federal Reserve cut interest rates to nearly zero and restarted programs that pumped money into financial markets.
Big Wall Street investors, comforted by the Fed’s moves, barrelled right back into the stock market. But alongside the whales were minnows.
In March, Google searches for “how to buy stock” soared. Account openings at brokerage firms shot up. Trading in tiny amounts of stock options — a favorite of retail traders — picked up. The brokerage industry’s shift, in recent years, to a commission-free trading model pioneered by Robinhood, the preferred app of young investors, helped the boom. So did social media, which enabled millions of people stuck at home to research stock trading ideas, exchange tips and brag about their wins.
“Threw my stimmy into the stock market and damn, it’s been a beautiful morning,” Mr. Sanchez, the trumpet player, tweeted on Monday.
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