Stimulus cheques have buoyed America’s stockmarket

America’s stockmarket enjoyed a steady bull run between 2009 and 2021. Although the advent of the covid-19 pandemic briefly sent stock prices down, the rebound was substantial: $10,000 deposited into a fund tracking the s&p 500 in March 2020 would have grown to $21,416 at the market’s peak in December 2021.

Many retail investors performed much better. Tales of newly minted meme-stock millionaires who got rich backing GameStop, a video-game retailer, prompted some observers to reconsider the skills of retail investors. Might they have some strategic advantage over the pros?

One explanation may be significantly less sexy: $800bn of stimulus cheques. A new paper by Robin Greenwood of Harvard and Jeffrey Wurgler and Toomas Laarits of New York University explores how big the effect was. They observed that from January 2020 to April 2021 an equally weighted portfolio of stocks in which retail investors were most active gained nearly 150%, against 38% for the overall market.

To discover the direct effect of the stimulus, the researchers first needed to find the precise dates on which the payments were received. As the poor spend a bigger share of their incomes than the rich, they expected the stimulus to cause large surges in spending in poor areas. Sure enough, the authors found distinct spikes following each of the three rounds of cheques.

Because the stimulus money went to individuals, not to institutional investors, it is the most likely cause of any divergence in performance between shares favoured by small buyers and those preferred by asset managers. Just before the cheques were paid, returns among stocks with unusually high retail interest were unremarkable. In contrast, in April 2020—two weeks after the first round of “stimmies”—these shares gained 13%, whereas the overall market was up just 2%. And two weeks after Americans received another $600 in December 2020, the same retail portfolio had surged by 24%, compared with 4% for the market as a whole.

Surveys estimate that 10-15% of the stimulus money, around $100bn, was immediately invested in the stockmarket. The researchers found that a third round of stimulus in March 2021 had no effect, which suggests that, by then, many Americans had found something else to spend Uncle Sam’s money on.■

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Sources: “The economic impact of covid-19”, by Raj Chetty et al., 2020; “Stockmarket stimulus”, by Robin Greenwood, Toomas Laarits & Jeffrey Wurgler, NBER working paper, March 2022