Home > New Fiscal Stimulus to Support Equities – For How Long?

New Fiscal Stimulus to Support Equities – For How Long?

The United States delivered an unprecedented response to the COVID-19 crisis. Both the monetary and fiscal stimulus dwarfed anything seen in other parts of the world. 

More impressive, the speed of the responses was impressive as well. Take the recent deployment of the new round of fiscal stimulus.

In the last two weeks, the market participants found out that the Senate approved the stimulus bill, the President signed it into law, and accounts are already debited with $1,400 or more, depending on each household’s situation. According to some estimates, over $240 billion already reached American households in less than two weeks since the Senate passed the bill.

Where would this new money go? Some of it into the real economy – thus, retail sales are expected to grow. Some other part will go into savings (uncertainty remains) or deferred spending (waiting for the summer vacation to spend it). Yet, a big chunk will go to investing in the U.S. equities.

America and the World Thinks Beyond COVID-19

A study by Deutsche Bank Research points out that a big part of the new stimulus checks will end up being invested in the stock market. More precisely, some 50% of it in the age group 25-34, or 15% in those aged 55+.

Moreover, a global fund manager survey run by Bank of America reveals that COVID-19 is no longer viewed as the biggest tail risk. People are now concerned with higher than expected inflation, a tantrum in the bond market, but also with a bubble on Wall Street.

Every trader and investor knows that for every transaction, there is a counterparty. Therefore, those willing to buy equities at current valuations should know that someone else is selling them. In other words, there is always someone else on the other side of the trade willing to take the opposite bet.

Because of that, the next few weeks are crucial for the U.S. stock market. On the one hand, we know for sure that a big part of the new stimulus ends up invested in the stock market. On the other hand, if the market does not advance significantly, it means that investors willing to sell at current levels dominate the ones willing to buy. Or, the volume on the short side is bigger than the one on the long side. More precisely, outflows exceed inflows.

All in all, the world already looks beyond COVID-19, with America leading the way. What will the stock market do next?

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