Many on Wall Street are grasping at the boring market hypothesis to explain last year’s meteoric rise: The recipients of the incentive checks, who were not allowed to travel or participate in other activities, indulged in promotions ranging from GameStop to electric car start-ups. When the economy rebounds, investors will have to deal with the effects of more people spending their checks on the street.

Two weeks ago, the Treasury Department began sending $240 billion in electronic payments to households. According to data released this week by JPMorgan Chase, Chase credit card spending is only 1.6% below its pre-crisis trend, after falling 40% last March.

This time, however, the stimulus is not reflected in the stock market.

Daily stock purchases by individual investors have remained steady at about $11 billion on a 10-day basis in recent weeks, according to data from tracking tool VandaTrack. This is in stark contrast to what happened in April 2020, when the controls led to an immediate increase in trade flows, or in January this year, when the effects were evident even after two weeks.

Fund managers, both amateurs and professionals, should pay particular attention to this. In a study published this week, researchers at the Swiss Institute of France found that individual investors had a disproportionate impact on the market in the second quarter of 2020, compared to institutional investors, because they were more sensitive to price changes : Every dollar invested in the Robinhood application with zero investment cost resulted in a $5 increase in capitalization.

Households typically make spending decisions first and then decide how to invest their savings, rather than choosing between going to the movies and buying GameStop stock. But the obligation to stay indoors has made hot market gambling a new form of entertainment. Behavioral and economic studies also show that people tend to spend one-time gifts more frivolously.

Today, thanks to vaccinations and the relaxation of the blockade, there are more opportunities to spend lavishly abroad. According to the survey, card payments increased the most in hotels, restaurants and shops.

In the absence of travel and other activities, incentive check recipients played hot promotions like GameStop.

Photo:

aka zieminski/reuters

Moreover, previous stimulus cycles hit people’s bank accounts at a time when stocks were doing well for individual investors. This time, it happened right after a sharp decline in their portfolios, according to estimates from VandaTrack. Playing Wall Street Trader is a lot less fun when you lose.

The absence of this tidal force should, at least in the short term, have an impact on how markets trade.

First: The enthusiasm for reopening the stores in 2020 is largely due to individual investors. Without these measures, sectors such as airlines, hotels and cruise ships will benefit less, even if the summer season is in line with increased market expectations. Private investors have also favored stocks in electric cars, space technology and cannabis, which have been stagnant of late.

The implications for the broader technology sector are less clear. There is a lot of retail money exposure, but the flow to passive, technology-driven cars continues to grow. This suggests that many people see them as a sensible place to save for the long term. Core companies like Apple and Alphabet may be in a better position than smaller companies.

The boom in the trade of useless applications is not a purely pandemic phenomenon. It seems that funds are still flowing to online browsing forums like GameStop, suggesting that a few organized enthusiasts still want to support individual companies. In general, however, the role of boredom in asset pricing models is expected to decline significantly as Americans rearrange some of their lives.

The GameStop craze has caught the attention of a growing group of investors who seek out and share company information on social media platforms like YouTube and TikTok. Three investors explain how these online communities are helping them capture the market. Illustration photo: Adam Falk/Wall Street Journal

Email John Sindreu at [email protected]

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frequently asked questions

Will the stock market eventually recover?

As long as there is economic growth, the stock market will always rebound and reach new heights in the long run as sales increase, resulting in higher returns.

What happens when the stock market disappears?

In a country without a stock market, income levels between the upper and middle classes could be more balanced. However, the global economy may not be as strong and many of our major companies will no longer exist.

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