Still deeply entrenched in a global pandemic, U.S. household wealth soared to a record high in late 2020, as did the share of that wealth Americans have invested in the stock market.
Those numbers are still surging today as billions of dollars in government stimulus, one $1,400 check at a time, flood equity market in search of fresh highs and the next GameStop Corp. after the epic, Reddit-fueled short squeeze that sent the videogame retailer's stock to dizzying heights.
Nearly 10% of the $1.9 trillion stimulus plan recently signed into law could wind up in the stock market, equity analysts believe. That may be a windfall for some brokers and lucky retail investors, but it is a discouraging outcome for those who believe the stimulus core mission was to mend an ailing domestic economy.
"If stimulus money is going into stocks, then the stimulus was an extremely poorly designed waste of taxpayer money," said Mike O'Rourke, chief market strategist with JonesTrading, in an interview. "The money going into stocks does not help the real economy, where stimulus is intended to fuel consumption."
Rather than boost income or access to credit, the drivers of increased consumption and a stable economic recovery, a significant portion of the stimulus may simply accelerate the recent rush of retail traders in equities.
"This is an unintended consequence," said William Emmons, an economist and assistant vice president with the Federal Reserve Bank of St. Louis.
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The stimulus checks arrived amid a swell of retail trading in U.S. stock markets, as amateur investors were lured to online brokerages following the market's March 2020 trough by solid returns and ample time to trade from home as lockdown measures took root.
Trading volume in the over-the-counter market, known for its penny stocks and dominated by small, retail traders, has skyrocketed by more than 150%, from $33.43 billion at the end of February 2020 to nearly $84 billion at the end of February 2021, according to Sundial Capital Research.
A recent Deutsche Bank survey of 430 U.S. users of online brokerage platforms found that more than half had already invested a portion of previous stimulus payments in the stock market. But those previous investments were relatively small, and respondents said for this stimulus they plan to put a "large chunk," on average nearly 40%, of their check into stocks, according to the survey. This could translate into a "sizable inflow" into equities of roughly $170 billion, about 9% of the total $1.9 trillion stimulus, the survey says.
This is counterintuitive to the intent of the stimulus and an illustration that the stimulus checks were not well-targeted, said Emmons with the St. Louis Fed.
"If the purpose of the policy was to find the people in need — this classic sort of putting food on the table, paying your rent — those are the people this policy was designed to help. Anybody who saves or pays down debt or puts it in the stock market — those are not the people this policy was intended for," Emmons said. "The money's not going just to people who desperately need it, it's going to a lot of people who don't desperately need it."
This expected rush of new money into the stock market follows U.S. household net worth ending 2020 at its highest level on record. Household net worth — the difference between assets and liabilities — was at $130.2 billion in the fourth quarter of 2020, up about 17% from in the first quarter when the pandemic began, according to Federal Reserve data.
Much of this is due to U.S. households' holdings of stocks, which climbed more than 50%, from $26.4 billion in the first quarter of 2020 to $39.8 billion in the fourth quarter. Corporate equities holdings comprised about 31% of U.S. household wealth in the fourth quarter of 2020, more than double where it was just over a decade ago, the data shows.
Despite these leaps, household wealth, particularly stock wealth, is a poor barometer of the state of the economy, Emmons said.
For one, the wealth is heavily concentrated. Roughly 10% of U.S. households hold about 80% of stock market wealth, he said.
"That group also has a lot of income and very good access to credit, so changes in their wealth don't really make a lot of difference [to the overall economy]," Emmons said.
Essentially, the direction of the stock market tends to have little to no impact on spending by high-wealth households. Whether the market is going up or down, these households tend to spend about the same, leaving the broader, consumer-driven economy largely unaffected by these moves in equities, he said.
This, Emmons said, may be motivated by stockholders' perceptions of the market.
"Somebody that has a good understanding of these markets — and not everybody who is rich does, but many do — they know there's a lot of volatility in these numbers," Emmons said. "In effect, you see the stock market go up $100, you may think it should only have gone up $50, so that may also tamp down spending."
It remains unclear what impact the expected rush of more retail traders and their stimulus money into the stock market might mean.
"Wall Street is still trying to figure out the impact of the new retail trader and are they big enough to cause the next crash," said Edward Moya, a senior market analyst with OANDA.
Moya said these relatively smaller traders could boost individual stocks or further drive up valuations in the pandemic-friendly sectors, such as consumer discretionary, communication services and tech.
But Michael Crook, deputy chief investment officer at Mill Creek Capital Advisors, said he expects the impact of these retail traders on the overall market to be "somewhat muted." Even with all this stimulus money expected to go into the market, Crook said even a significant market crash would also not deter the post-pandemic economic rebound.
"Assuming an equity pullback is not caused by pandemic-related issues that result in new shutdowns … an equity decline would have a small impact on the real economy," Crook said. "We'd still expect to see robust employment growth and the release of pent-up household savings."