Stimulus: A Windfall (and Danger) for Stocks

Perhaps the famous recruiting slogan should be reworded: Uncle Sam wants YOU…to trade stocks.

The U.S. House on Wednesday approved the Senate-passed version of President Biden’s $1.9 trillion coronavirus relief package. Biden intended to sign the bill Friday but surprisingly announced he would do so a day earlier, on Thursday. With the bill’s provisions for $1,400 stimulus checks, stocks are likely to benefit as many individual investors plow their government windfall into online trading.

A recent survey conducted by Deutsche Bank (NYSE: DB) of 430 retail investors found that on average they plan to devote 37% of any stimulus checks directly into stocks, which the bank calculates could represent an inflow into the market of $170 billion. Half of survey respondents between 25 and 34 years old plan to spend 50% of their stimulus payments on stocks.

The survey’s results are a generally bullish sign for the stock market over the short term, but therein also lays a risk. Inexperienced and impulsive investors whose trading decisions are fueled by social media chatter could add volatility to the market in coming days, especially in regard to “meme” stocks such as video game retailer GameStop (NYSE: GME).

These are the sorts of investors who run for the exits at the first whiff of bad news, a dynamic that could create a downdraft for the broader market, which hovers at record levels and remains vulnerable to a pullback.

For now, the post-election rally appears intact. On Wednesday, the Dow Jones Industrial Average soared 464.28 points (+1.46%), to reach an all-time high of 32,297.02, the Dow’s first close above 32,000. The S&P 500 jumped 23.37 points (+0.60%) and the tech-heavy NASDAQ slipped 4.99 points (-0.04%).

A catalyst for the rise in stocks was U.S. government data released on Wednesday that showed the consumer price index (CPI) increased only 0.4% in February, in line with consensus expectations. The CPI over the past 12 months gained 1.7% year-over-year, also meeting estimates and falling below the Federal Reserve’s standard target of 2%.

In recent columns, I’ve contended that dire warnings from “fiscal hawks” about economic overheating and extreme inflation are overblown. The economy is mending but we still have an emergency on our hands. Strong fiscal measures are warranted.

Watch This Video: (Don’t Fear) The Inflation Reaper

The latest good news on inflation assuaged a major anxiety for investors. In pre-market futures contracts Thursday, all three major U.S. stock indices were trading in the green.

It’s been a year since the World Health Organization’s declaration on March 11, 2020 that the coronavirus outbreak was a pandemic, triggering jaw-dropping stock market losses. The market has staged a spectacular rally since its lows of last March, thanks to trillions of dollars in stimulus around the world.

You should be optimistic about stocks this year, but don’t get complacent. One negative factor is persistently high unemployment. Notably, despite the encouraging news on the jobs front, the leisure and hospitality sector remains under pressure. According to the Bureau of Labor Statistics’ latest Employment Situation Summary, the number of jobs in leisure and hospitality still trails pre-pandemic levels by 3.5 million.

A jobs recovery is genuinely underway, but it’s proceeding slowly. A year into the pandemic, total nonfarm employment is still 9.5 million jobs short of February 2020 levels (see chart).

All that said, the positives for stocks outweigh the negatives. A major tailwind is the generally better-than-expected performance of corporate earnings in the fourth quarter of 2020 and optimistic earnings projections for Q1 2021. More S&P 500 companies have issued positive earnings guidance for Q1 2021 than average.

Global and U.S. economic growth projections are sanguine as well, with the global growth engine of China rebounding. The world’s second-largest economy is poised to grow by about 7.9% in 2021, according to the World Bank.

Read This Story: Red Dragon Rising: The Profits and Perils of China

The coronavirus pandemic originated in China, but after initial missteps, the regime clamped down with a strict and coordinated public health response that contained the outbreak sooner than other countries. Consequently, China has been able to put economic reopening on a fast track.

The rally in U.S. and global equities should continue this year, albeit with inevitable dips along the way. It makes sense right now to rotate into cyclical stocks that benefit from reopening. Part of this rotation also entails a shift from large-cap to small-cap stocks. Year to date, the Russell 2000 has climbed 4.5% versus 3.2% for the S&P 500 (as of market close March 10). Historically, small caps outperform when investors are bullish about economic growth.

Editor’s Note: I’ve just described the opportunities (and risks) ahead. If you’re looking for an investment method that succeeds regardless of economic ups and downs, turn to my colleague Jim Fink.

Jim Fink is the chief investment strategist of Velocity Trader, Options For Income, and Jim Fink’s Inner Circle. He’s also a world-renowned options trader.

Jim has devised a proprietary options trading strategy that racks up profits regardless of the pandemic, stock market gyrations, or political turmoil.

Jim’s all-weather trading system makes money in bull, bear or flat markets…during rallies or corrections. To learn Jim’s wealth-building secrets, click here.

John Persinos is the editorial director of Investing Daily. You can reach him at: mailbag@investingdaily.com. To subscribe to John’s video channel, follow this link.