'Stimmy' Checks And The Stock Market: Will The Retail Trading Frenzy Continue?

The recession triggered by the pandemic has been unique compared to recessions of the past. The shutdown of the U.S. economy was voluntary and not triggered by a sharp downturn in economic fundamentals.

Buying The Dip: As a result, many investors saw the stock market sell-off last March as a long-term buying opportunity, and investors have been handsomely rewarded for that buying. In addition, the brief 2020 bear market was the first bear market buying opportunity for investors in more than a decade, and the availability of free trading apps lured in an entire new generation of young traders for the first time.

March 23 marks the one-year anniversary of the 2020 bottom in the S&P 500. While the SPDR S&P 500 ETF Trust SPY is remarkably up 75.9% in a year’s time, some high-octane stocks have skyrocketed much more than that.

Younger retail users of trading app Robinhood, Reddit’s WallSteetBets community and other groups of online traders have poured cash into a collection of fundamentally sound long-term investments and high-flying short squeeze trades and so-called “meme” stocks. Cryptocurrencies ranging from Bitcoin BTC/USD to Dogecoin DOGE/USD have also skyrocketed.

Related Link: GameStop Is Losing Its 'Stimmy' Support, Analyst Says

YOLOing The Stimmy: Analysts say one of the bullish catalysts for stocks in the past year has been the massive amount of stimulus the U.S. government has pumped into the economy. Part of that stimulus has been three rounds of direct stimulus payments to individual Americans.

Bank of America analyst Curtis Nagle recently discussed the high correlation between the price action in meme stock GameStop Corp. GME and social media conversations related to stimulus payments.

It appears many retail traders that were stuck at home throughout the pandemic and didn’t need their stimulus payments to pay the bills put those payments straight into their trading accounts. But with the economy set for a shart recovery in 2021, there will likely be no more stimulus payments down the line.

Themis Trading's Joe Saluzzi told Benzinga trading apps like Robinhood have been designed to maximize user engagement, much like online gambling platforms.

“It’s no surprise to me that some recipients of stimulus payments would choose to place this money into their trading account hoping to magnify those payments. But we have to ask ourselves, is this what investing is all about or is this gambling?” Saluzzi said.

Investor Sentiment: JJ Kinahan, TD Ameritrade's chief market strategist, told Benzinga the stimulus payments have served their purpose up to this point in giving retail investors confidence that the economy can make it through to the other side of the crisis.

"In reality, it is the type of thing that gives all investors confidence that spending will continue at all levels of the economy and help keep things on track or even improve," Kinahan said. "The spill-over effect is much more confidence, particularly in retail, which can help the rest of the economy in growing, particularly during this grey area between some states being wide open while others are gradually opening up."

Goldman Sachs recently found that retail traders have accounted for nearly 25% of all trading activity in the past year, up from an average of about 10% over the decade prior to the pandemic. Much of this trading has apparently been bankrolled by the U.S. government. And studies have repeatedly found that the vast majority of individual traders underperform the market over the long-term.

Benzinga’s Take: There’s an old saying on Wall Street that every trader feels like a genius during a bull market The extreme gains in the S&P 500 over the past year have resulted in 487 of the 500 S&P 500 components producing overall gains for investors in the past year.

Virtually any stocks new investors bought in the past year have made them money at this point. The danger in the longer-term will come if that initial success has created a general sense of overconfidence in younger retail traders that will result in them taking an overly risky approach to investing in a much more difficult future environment.