Stimulus Checks Fuelled Speculation During the Pandemic

Summary

• Researchers from Harvard Business School and NYU Stern examine how US stimulus checks impacted stock prices during the pandemic.
• They find that on the days households received their payments, the number of US retail-initiated trades grew 8%.
• And for every 1% inflow from these stimulus checks, the prices of popular retail stocks increased 2-4%.

Introduction

Government mandates changed during the pandemic. Policies pivoted from being mainly redistributive to being the primary driver of economic growth and stability. Unless the long-term interest rate permanently shifts away from zero, governments will lean on fiscal policies again in the next recession (and we think one could be coming). So, what can we learn from their influence last time?

Researchers at Harvard Business School and NYU Stern want to find out. They investigate how US stimulus checks (see Appendix for further details) affected stock prices during the pandemic. And they ask, did these short-term instruments have long-term consequences on the stock market? In short, their impact on stock markets was large but relatively short lived.

The Theory – Retail Investors

How might governments have helped the stock market recover during the pandemic? The authors look at two channels. The first was on the announcement of the stimulus checks, via the CARES Act. In anticipation of a $5tn stimulus and the associated changes in cash flows, the market should have moved in response to a large positive shock to fundamentals.

The second was through retail investors. There is anecdotal evidence of a ‘bored market hypothesis’, where individuals began investing during the pandemic because the trading platforms make it fun and there was nothing better to do. It builds on other work that shows how retail trading and liquidity increase when retail investors have more time.

So, in the context of stimulus checks, we have a perfect case study. Households received an unexpected increase in their incomes that, if the theory holds, they should have used to some degree to invest in stocks. If true, then a downward demand curve means stock prices would have risen on the arrival of these stimulus checks.

In Practice – Data and Methodology

The paper focuses on the second channel – how did the government impact the stock market through retail investors? To test this, the authors require the dates households received these checks, an insight into the retail trading behaviour around these dates, and the prices of the stocks in which retail traders were investing.

The relevant dates are 24-26 March 2020, during which the CARES Act passed, and 12-14 April 2020, 29-31 December 2020 and 11-13 March 2021, on which the first, second and third rounds of stimulus payments reached people’s bank accounts.

For the stock price data, the authors select only stocks with the greatest retail interest. These are stocks with the highest number of Robinhood-using owners (e.g., Ford, Disney, GoPro, and American Airlines) and with a high level of retail trading (as measured by the prior month’s retail share of trading volume) according to FINRA.

Finally, to capture the level of retail trading around these dates, the authors measure retail order buys and sells. They use information on trades from the TAQ database to create daily measures of net retail buys (buys minus sells), retail volume (buys plus sells), and retail dollar volume (buys*price plus sells*price).

Trading on Stimulus Check Days

First, the authors study how stimulus payments impacted the number and dollar volume of retail-initiated trades across the market. The punchline: the checks increased both. Chart 1 gives a graphical indication of the spikes in retail trading around stimulus check disbursement dates. Statistically, the total number of retail-initiated trades rose 8% around the event dates. And a higher fraction of these trades were buys.

Digging deeper, they find that stocks with large past retail trading volume see the largest increases in retail trading activity around check disbursement dates. That is, retail investors who spent some of their checks on stocks chose stocks they already had their eyes on. Moreover, the duration of these rises is only significant for less than 15 days, meaning the effects of these stimulus checks are rather short lived.

Stimulus Checks and Stock Prices

The authors create long-short portfolios formed on retail share of trading volume (RSVOL), where essentially the long leg of the portfolio represents high retail ownership. They examine the portfolio returns around the stimulus check days to highlight the effect of retail investors on stock prices.

Starting with the first stimulus check on 13 April 2020, the long-short portfolio sees a large abnormal return of 5.6% on 13 April. And it sees a cumulative return of 10.6% and 14.5% over the three- and 15-day window, respectively (Chart 2). These results are shown to be driven by the long side of the portfolio and are despite the aggregate market being down on 13 April and flat over the three-day period.

For the second stimulus check, which was a substantially lower per-check average payment than the first, there was a weaker short-term response (1.1% on 30 December 2020). The long-term response was similar, though, with a 15-day abnormal return of around 18%. For the final stimulus check, on 12 March 2021, there was no evidence of any return boost.

Fiscal Multiplier

Much has been made recently of fiscal multipliers. Simply put, they state that for every $1 extra spent by the government, $x extra goes into the economy. Essentially, they are an elasticity that gives a rough measure of how beneficial a policy may be. The effectiveness is often a function of many things, such as the type of policy and the macroeconomic environment.

From the paper, evidence suggests these stimulus checks have influenced the stock prices of the firms that retail traders are most likely to hold. The authors can create a similar price multiplier to indicate the magnitude of the result. They estimate that for every 1% inflow from these stimulus checks (as a percentage of market cap), the prices of popular retail stocks increase 2-4%.

Bottom Line

US stimulus checks were a lifeline for many households. But as many as one in three used the checks mostly to increase savings. According to this research, a non-trivial number of individuals also used those payments to invest in the stock market. Perhaps, then, the target audience of the stimulus checks was too large.

Economic theory is clear. Wealthier individuals are more likely to save when they receive additional income. They are also more likely to be active in the stock market. By induction, quite a few recipients did not need the checks, and roughly $60bn made it into the stock market. Was it the most efficient use of government money? It is hard to say. Regardless, it is yet another example of how fiscal policies can have large macroeconomic impacts when monetary policy is broadly ineffective.

Appendix

US Stimulus Acts

The Economic Impact Payments, better known as ‘stimulus checks’, were direct payments to around 170mn US households. They formed part of three multifaceted acts – the CARES Act, the Consolidate Appropriations Act, and the American Rescue Plan Act.

The size of each payment was phased out with higher incomes, but all adults with an income of less than $99,000 were eligible for something. The total amount paid out was at least $276bn, $147bn and $391bn over the three Acts, respectively, making a total of $814bn.

The US Census Bureau, in conjunction with five other government agencies, found that 9.3% of households surveyed mostly invested or saved their first stimulus check. For the second check, this rose slightly to 15.1%. For the third stimulus check, 18.7% reported mostly saving or investing the proceeds.

Another survey found that 33% of individuals used the checks ‘mostly to increase savings’. And based on a triangulation of the surveys, the Harvard and NYU researchers believe a reasonable estimate of how much was invested in stocks might be 10-15% of the total stimulus check payout of $814bn. This is about $100bn – or under 1% of the US stock market cap.