The Impact of Stimulus Checks On the Stock Market

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Viktualienmarkt
Munich Viktualienmarkt. Customers at the famous green market Viktualienmarkt in the center of Munich. Traditional Maypole to the right.

Millions of people have been using their stimulus checks for daily essentials like food, rent, and gasoline. But just as many have been putting their government cash to good use by buying into the stock market.

Both are equally valid ways for kickstarting vital post-pandemic recovery. But what has been the impact of stimulus checks on the stock market?

Is it a good thing? Or is it like lambs to the slaughter as newbie traders place bets in the hope of getting rich quickly?

No matter how gloomy things look on the stock market, there is always a silver lining for those intelligent enough to cash in on opportunities.

However, the current stock market bubble is no small part due to new investors piling in.

As far back as January, Forbes was cautioning that stimulus checks would blow up the stock market. They based their gloomy prediction that back then, the best-performing stocks were those with a low price tag.

This surge was in part thanks to today’s traders staging a pile-on to micro-caps in the wake of the first stimulus check.

And with the more extensive stimulus check arriving in its wake, new and small investors have been flexing their muscles evermore. Indeed, this contention has been repeatedly backed by survey data which shows spikes in stock activity around the dates of stimulus checks being distributed.

Bloomberg, too, has been onto the trend. They cited a Deutsche Bank survey that suggested as much as $150 billion from retail investors could go into stocks. After having pushed stocks to historically high levels in January 2021, the expectation was that they would spend some 37% of stimulus checks on stocks.

The big fear, Bloomberg noted, was that stimulus checks could end up overcooking the economy.

Meanwhile, the nonpartisan Center for the National Interest voiced concern that many of those rushing to buy stocks may not be in a position to absorb potential losses. This was particularly true if they invested in so-called meme stocks and researched Reddit after the extraordinary Gamestop chaos.

In a widely read blog post, the center highlighted that the Deutsche Bank survey identified younger, often new investors and aggressive traders not averse to using leverage to be behind the surge in retailing stock trading.

Serial investor and financial market guru Warren Buffett is likewise concerned for the future, having pushed for a more conservative approach last year in a virtual shareholders’ meeting of Berkshire Hathaway.

However, despite these sage warnings, it’s evident that with lockdowns in place, many people decided to game the stock market to beat their boredom and make a little easy money on the side.

Whether the recent alignment of various factors like the pandemic, remote working, and a spike in stock market interest will pan out successfully for the economy is an open question.

If the analysts and strategists believe, much of the current stock market bubble is being driven by stimulus check investment. And bubbles, as they always do, go bang in the end, usually with nasty consequences.

The question now is whether pushing your free government money into stocks is a smart move in the long run. If the economy becomes overheated – and there are signs that that is the case – then speculating on the markets could backfire spectacularly. And not just for individual investors but for the economy as a whole. Coming out of pandemic and into recovery is assuredly not the best time for boom and bust economics.

How the whole stimulus check scenario works out is worrying the Wall Street Journal. This concern is no small part due to the continuing fears surfacing about rising inflation on the back of government check writing and significant pent-up demand.

Markets, the WSJ pointed out, are volatile with the threat of increasing inflation spooking many, including growth stocks and the technology sector. Cyclical shares, meanwhile, have remained steady and climbed upward in the expectation of renewed economic activity.

Discerning a pattern on a day-to-day basis is, however, challenging to determine and no more, ultimately, than a snapshot in time.

Of course, it’s unwise to consider the impact of stimulus checks on the stock market in isolation. It is just part of the $1.9 trillion recovery package put together by the Biden administration, including help for childcare and massive investment in infrastructure. At the same time, the COVID-19 vaccination program is being successfully rolled out, allowing much greater parts of the economy to open once again for business.

Despite the general bullishness around investing with stimulus checks, there are always some hand-wringers wondering about how it is all going to end. None more so than USA Today, which warns that the easy stock market money train is about to get derailed.

The past year, it acknowledges, has been remarkably unusual for several reasons. But for new pandemic lockdown investors, it is all they have known. Millions of people decided in 2020 to take the plunge, thanks to having time and money on their hands.

Indeed, some 15% of all active stock investors started trading for the first time in 2020, as highlighted in a recent Charles Schwab survey. So it is hardly surprising that many traders perceive stock trading as easy when the market has steadily risen for over a year, almost doubling in the process.

Equally predictable is the tendency for new yearling investors to be more optimistic than their more seasoned counterparts.

What they have yet to experience, though, is the downward spiral that is coming down the line like a slow-motion train wreck. The burning question is when and for how long.

The adage is that bull markets always arise phoenix-like from the ashes of a bear market. It has always been thus and always will be. It’s human nature, after all.

One thing this new band has in its inexperienced but youthful outlook is time. And they’re going to need it to make up the losses that lie ahead.

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