19.01.2020 – Special Report. The helicopters rev up their engines – soon they will be loaded with new government money to throw on the road. Recently, the Americans received a cheque for 600 dollars. Soon they will be joined by a second gift from Father State for $1,400. Many bucks should flow immediately into the stock market, some professionals believe. Because retail traders are investing as if there were no tomorrow. We analyse the background.
2,000 dollars from the state
A new round in Modern Monetary Theory: to stimulate the economy and finally create inflation, the government is bypassing the banks and transferring money directly to the citizens. Now it will only be a new stimulus cheque in the amount of 1,400 dollars that Joe Biden wants to distribute to Americans. Some media had mused about 2,000 new dollars. But together with the first helicopter money of 600 dollars, it will be 2,000 greenbacks.
Fresh concentrated feed for traders
The financial blog ZeroHedge therefore sees the S&P 500 pulling away above the 4,000 mark. This is because much of the money is likely to flow immediately into the stock market. Bloomberg also just noted that the first 600 dollars had meant a strong boost for options trading and for the business with penny stocks. The news agency noted that across all income groups, trading was up 30 percent in the first ten days of January compared to December. And people with incomes above $75,000 increased their trading by a particularly strong 53 percent.
The bubble continues to grow
Peter Cecchini, founder of AlphaOmega Advisors commented:”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. If it goes to people with below-average incomes, speculation will be less likely.” ZeroHedge commented: The money will now flow not only into high-risk asset classes such as cryptos, but into penny stocks, dubious start-ups and other cash burners. „we are at peak euphoria. In fact, the options market saw its second busiest day ever for bullish equity calls this week and penny stock volume is up 6x from last year.“
Unbridled appetite for risk
In fact, Goldman Sachs just reported a level of 1 in its own Risk Appetite Indicator – the RAI had thus reached its highest level in four years and was scratching the all-time high. So we have reached a bullish extreme: the RAI has been above 1 in only 1.7 percent of all cases. Goldman went on to say that at current levels the market is more vulnerable to negative growth or interest rate shocks, triggered for example by fiscal policy disappointments or new negative Corona news. However, Greg Marcus of UBS Private Wealth Management said, “I think the market is very much looking through the pandemic, and that’s why we see it continuing to drift higher.” Goldman, meanwhile, does not expect any new stimulus from monetary policy: in the coming months, the appetite for risk will be triggered primarily by growth and a reflationary sentiment.
Passive funds as boosters
But as reported more frequently recently, the fear of a bubble remains. In fact, a new study supports the assumption that investments by passively managed funds have inflated the prices of the largest stocks into a bubble. That’s what a team from Michigan State University, the London School of Economics and the University of California Irvine found, analysing data from 2000 to 2019. The study states that “noise traders” (passive investors) “tend to push up the price of fashionably big companies as they enter the S&P 500”. This ensures that these companies are given greater weight, which in turn leads to a self-fulfilling prophecy when new passive traders enter the market.
In other words, everyone wants the shares that are in demand anyway. Such a trend can, of course, quickly turn into the opposite. But there is a remedy: according to the study, small caps offer both protection against a setback and the chance of outperformance. Our conclusion at this point: there is a lot to be said for a continuation of the bull market. If you don’t want to see the purchasing power of your savings destroyed by helicopter money, you have to invest. But at some point the bubble will burst. The Bernstein Bank wishes you successful trades and investments!
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