Stimulus Checks Bring Hope for Bull Market Roiled by Bond Yields

Stimulus checks from President Joe Biden’s $1.9 trillion pandemic relief plan will soon start arriving, a potential panacea to reignite the stock market rally.

About $150 billion could flow into stocks, based on a Deutsche Bank AG survey of retail investors indicating 37% of the direct payments will go into shares. An earlier inflow of stimulus cash helped push U.S. stocks to a record in January.

Market participants are asking if history will repeat itself. Standing in the way of the bulls are higher bond yields, which have sparked a selloff in big-name growth stocks that could yet end up restraining equity benchmarks.

“Assuming the $1,400 U.S. stimulus checks start being paid this or next week, there is a good chance that we see a repeat of the end of last December,” wrote JPMorgan Chase & Co. strategists including Nikolaos Panigirtzoglou in a note Tuesday. “On the negative side, the recent bond yield increases and the loss of momentum in stocks popular with retail investors are creating a more challenging environment” for the latter, they added.

Stimulus Checks Bring Hope for Bull Market Roiled by Bond Yields

The House is poised to send the Covid-19 relief plan to President Biden for his signature after its expected passage Wednesday morning. More than $410 billion will go to low- and middle-income households, the largest batch of direct household payments yet during the pandemic. The sheer size of the overall stimulus package has raised concerns about overheating the economy, sending Treasury yields skywards at a furious pace.

Rotation

That accelerated a rotation out of high-priced technology stocks into cheaper cyclical shares. But the latter have smaller weightings and must perform disproportionately better to prevent declines in broader equity benchmarks -- sullying the bullish backdrop retail investors had become accustomed to.

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“All eyes might be on how much stimulus checks go into favored retail tech names again even if the same stimulus causes rising yields,” Jim Reid, a strategist at Deutsche Bank, said on Monday. “These markets are not going to be dull this year.”

Some commentators suggest the direct stimulus impact won’t be as bullish as it was in the past.

Stimulus Checks Bring Hope for Bull Market Roiled by Bond Yields

“Individuals receiving their stimulus checks may not be ploughing them into equities as aggressively,” Mizuho Bank Ltd. strategist Vishnu Varathan said in emailed comments Wednesday. “More so as the reflation driven lift in yields and rotation adds a degree of uncertainty to the ‘buy everything’ bet.”

FAANG

Bulls are likely to be scanning the options arena, where retail involvement has driven volumes to record levels and helped squeeze pockets of the market higher. Inflows tend to be more focused, as individual investors make bullish bets on favored names such as the so-called FAANG technology megacaps, Tesla Inc. or the ARK Innovation ETF.

Stimulus Checks Bring Hope for Bull Market Roiled by Bond Yields

“Is retail getting their ‘stimmies’ going to drive another round back to their beloved FANGMAN + TSLA (and maybe even some ARKK)?” asked RBC Capital Markets strategist Amy Wu Silverman in a recent note. “Receiving stimulus checks and increased call buying have been correlated during the last two rounds,” she said.

Silverman noted that amid the recent market volatility, demand for protective put options has soared, making the price of bullish call bets look comparatively more attractive than they were in January.

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