Stock Froth Boiled After $600 Checks. Now $1,400 May Be Coming

(Bloomberg) -- Here’s what happened in the market around the time the government sent people $600 earlier this month. Penny share volume mushroomed. A company that sounds like a word Elon Musk tweeted rose 1,100%. Tesla added $130 billion, IPOs doubled and options trading exploded.

Coincidence? Maybe -- though a lot of people doubt it. They can’t help notice how tiny traders with money to spend keep turning up in the vicinity of almost every market spectacle these days. Now, more federal aid may be on the way, and Wall Street pros are bracing for what comes next.

“If the additional $1,400 goes to the same income levels it did before, we are highly likely to see additional speculation in stocks, which could continue to inflate an already-existing bubble,” Peter Cecchini, founder and chief strategist of AlphaOmega Advisors LLC, said in an interview. If it goes to people with below-average incomes, Cecchini said, “speculation will be less likely.”

That may be, but data suggest anyone who gets the boost is more likely to put it in the market than those who don’t. Across all income groups, check recipients traded roughly 30% more in the first 10 days of January than they did at the start of December, data from Envestnet Yodlee show. Trading among those with annual incomes of less than $75,000 who received payments jumped 53%.

President-elect Joe Biden unveiled a $1.9 trillion relief plan on Thursday -- a lifeline to states and cities. More than 150 million Americans would likely be eligible for a $1,400 direct payment, on top of the $600 payments approved in December.

The sums would be hitting bank accounts at a time of full-blown mania in the market. Volume in penny stocks regularly tops 40 billion shares a day lately, up sixfold from a year ago, with day traders venturing off-exchanges and into the speculative over-the-counter markets. The options market saw the second-busiest day ever for bullish equity calls this week. Meanwhile, Goldman Sachs data show that a basket of retail-favored stocks has surged 10% since the end of December, beating both the S&P 500 and returns on hedge-fund favorites by more than 9 percentage points.

Nobody is saying more stimulus isn’t needed. Friday brought a stark reminder of the pandemic’s economic toll, with data showing that U.S. retail sales posted a surprise 0.7% contraction in December. A day earlier, jobless claims data showed that 965,000 Americans filed for unemployment benefits in the past week -- the biggest increase since March.

Given the number of Americans eligible to receive the payments, some of the $1,400 checks will inevitably land in the pockets of people who will either save it or invest it, rather than spend it on essentials. Such was the case with 23-year-old Ava Frankel of Boston, who works in the financial services sector.

“I told my friends, if you’re going to spend your stimulus check on shoes, you might as well just put it in Robinhood instead,” Frankel said in an interview. “The $600 check was just something extra I didn’t need so I just threw it in the stock market.”

Frankel latched onto a trend that’s become emblematic of the euphoria in markets: special purpose acquisition companies. She put the entirety of her stimulus payment into Churchill Capital Corp IV, a blank-check company said to be in talks with electric vehicle maker Lucid Motors Inc.

Should she receive a $1,400 check, Frankel said, she’d considering using that to trade, too, depending on “what’s going on” in markets.

“I would love to see a pullback in the tech sector because I would like to add to my positions in the tech names,” Frankel said.

By itself, Frankel’s $1,400 won’t cause a ripple. But if a portion of the millions of Americans set to receive checks do the same, the combined total could inflate the bubble that some say is already being formed, according to Logan Capital Management.

“If there is a bubble being created within the financial markets, to some degree, those checks do add to it because I think they’re going to chase performance,” said Chris O’Keefe, the firm’s managing director. “It used to be you added money to the economy and people went out and bought things -- cars and furniture -- now it seems to amplify what’s going on in the financial markets.”

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