Recall the political uproar last winter over the frenetic trading in meme stocks like
? Members of Congress blamed hedge funds, market makers and the online trading platform
Well, a new study has identified the more likely culprit: Congress’s stimulus payments.
U.S. households received $814 billion in three rounds of direct payments between April 2020 and March 2021. Congress gave low- and middle-income adults $3,200 each plus $2,500 per dependent to cope with the pandemic. Many instead used their payments to play the stock market, according to Harvard Business School and New York University economists.
Census Bureau surveys estimate that 9.3% of households mostly saved or invested their first check, 15.1% their second, and 18.7% their third. These estimates are a lower bound, the study’s authors say, because a substantial portion of respondents did not provide a breakdown of their spending. So the economists decided to explore how the arrival of stimulus checks affected stock trading.
They found that individual stocks with low prices, small market caps, high volatility and large numbers of Robinhood using-owners experienced the biggest increases in trading activity near the time of check disbursements. Returns of heavily retail-traded stocks increased by double digits in the three week after the arrival of the first two payments relative to less-trades stocks.
Curiously, they didn’t find a trading effect after the third payment in March 2021, even though they were larger than the first two and a larger share of Americans claimed to have invested the payments. The authors suggest that “the economics and psychology of the pandemic at this point” may have reduced retail inflows into meme stocks. Maybe once lockdowns eased, people spent less time day-trading at home.
Robinhood seems to think so. “We might be negatively impacted as the pandemic wanes, stimulus is phased out, and customers spend less time at home,” the company warned in its fourth-quarter earnings report. Its active monthly users declined by nearly 20% between last June and December.
The study’s authors dryly conclude that “the potential for broad-based direct payments to lead to speculation should be an element of future policy discussions.” Here’s betting it won’t.
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