For stock market bulls, there’s potential downside to economic opening


Changing trend: The trading floor of the New York Stock Exchange. Predictions that day traders would pour cash into the market have turned into forecasts for a surge in retail spending. — AP

IN retrospect, it was a slam-dunk bet that when stuck-indoors Americans were sent US$600 (RM2,470) stimulus cheques back in January, they’d plow a lot of it into the stock market.

But with the economy gradually opening, the calculus is less simple this time around as US$410bil lands in bank accounts around the country.

Back then, pajama-clad gamblers and bored workers who didn’t need the cash turned into market newbies, driving a surge in brokerage accounts and fuelling the stock rally.

Now data suggest vaccinated Americans are emerging from lockdowns ready to splurge on plane tickets instead of airline stocks. Disneyland beckons along with beach vacations and visits to relatives. Wall Street analysts are noticing. Predictions that day traders would pour cash into the market have turned into forecasts for a surge in retail spending.

“As vaccines proliferate and the economy begins to open up, particularly as we get into the summertime, those very same people that have been part of the active speculative public are much more likely to step away from their screens and use savings – whether it’s stimulus or otherwise – to go out and experience activities for the first time in a year, ” said Julian Emanuel, chief equity and derivatives strategist at BTIG.

If retail investors – who now account for 23% of all US equity trading, according to Bloomberg Intelligence – stay away, bulls will lose one of their most reliable allies in the past year.

The threat is not lost on Robinhood Markets Inc. The online brokerage favoured by the retail crowd is offering bonuses to clients who add cash to their accounts in the next week and a half.

But signs are mounting that spending has picked up on services largely unavailable when prior federal aid arrived. Searches for “Google flights” reached a peak popularity score of 100 last week, according to a Google Trends tracker.

Travel-related searches were already popular before news hit Friday that Americans would begin receiving stimulus payments and increased as the Treasury sent out US$242bil in the past week.

For a sense of the pent-up demand for travel, consider this: In the six years before the pandemic, the total amount of flight transactions settled by ARC, which manages airline sales for travel agencies, averaged US$90bil a year. In 2020 that total fell to US$23bil and stands at just US$2.8bil through February of this year.

The desire to break confinement was captured in a note by Bespoke Investment Group: “As vaccines roll out, case counts head lower, and state governments roll back pandemic restrictions, people have been getting back out and about.”

This can be seen in the Dallas Federal Reserve’s weekly Mobility and Engagement Index. The gauge hit a post-pandemic high at the end of February and continued to gain steam at the beginning of March.

Analysts such as Peter Tchir, head of macro strategy at Academy Securities, have questioned whether the latest round of stimulus will ultimately find its way into a stock market that’s already priced for its imminent arrival.

“I am told to be prepared for a wave of buying as stimulus cheques hit the account, ” Tchir wrote in a note. “I cannot help but fight this view.”

Yet not everyone is buying into the vacation zeitgeist.

A Bank of America Global Research survey showed that 53% of those making less than US$30,000 a year planned to save, invest or use the extra money to pay down debt. Historically that figure comes in at a blink-and-you’ll-miss-it 2%.

And for those among the top fifth of earners, 64% said they plan to put their cheques to work.

Brokerages aren’t conceding the new influx of cash just yet. In an attempt to lure “stimmy” money to its platform, Robinhood Markets unveiled a new promotion that rewards clients who deposit more than US$200 between March 15 and March 28 with between US$10 and US$250.

How a change in stimulus spending habits will weigh on the stock market is up for debate. With the economy set to grow at the fastest pace since the 1980s, stocks can power higher without retail cash flowing directly into shares.

That’s especially true if it the cash flows into the real economy, which could ultimately bring record valuations back in line with historical norms.

To Chris Gaffney, president of world markets at TIAA Bank, some of the stimulus money might still find its way toward stocks. Last year, when cheques were sent out, there were few opportunities to spend it because many activities were restricted. Still, he says, this round is different.

“There’s an opportunity for those individuals that get these cheques to spend them on travel, entertainment, leisure – those sectors are all opening back up – instead of putting them into their accounts or putting them into savings, ” he said. — Bloomberg

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