Insights & Advice

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CAPITAL IDEAS: Where is my ‘stimmy’?

A “stimmy,” according to Merriam-Webster, is a slang term that refers to the stimulus payments made to Americans as part of COVID-19 relief packages.

There’s not a lot of good data on how Americans have, so far, spent their 2021 stimmies. As an investor, it’s a good idea to consider where some of that roughly $400 billion in checks from the $1.9 trillion American Rescue Plan (ARP) will flow. Perhaps it will go where it has gone before?

An October 2020 Federal Reserve study found that 29% of the first round of stimulus checks were spent. Of the amount spent, nearly two-thirds went to essential items. Thirty-six percent was saved or invested, and 35% was used to pay down debt.

That same survey indicated that future checks would be used to buy less and pay down more debt. I referenced a Deutsche Bank survey more recently. It indicated that much of the ARP checks would be invested into the stock market. It’s too early to have a good collection of data on how people are actually spending their stimulus checks. But I’ve had conversations with people about how they intend to spend it.

It turns out that how, or even if, the stimmy will get spent depends on what part of the “K” recovery spectrum people fall. Economic recoveries are often described by the shape of letters of the alphabet. The K-shaped recovery explains how one group of American households have thrived over the last year while others have suffered.

The folks who are fortunate enough to be on the part of the upward sloping part of the “K” have told me they’ll invest it. They will either deposit it into their current portfolio or “put it away” to help pay for their kids’ college.

Other people, those who have endured the downward slope of the “K,” tell me they’ll use it to pay bills they’ve fallen behind on or pay for needed essentials.

This time around, I conclude people will spend more of their stimulus payments than they indicated they would in the October 2020 Fed survey. People are more optimistic today than they were just five months ago. The vaccination rollout and more than 1 million newly created jobs since then have made people feel less apprehensive about stowing away newfound cash.

I recognize that this a small sample size based solely on anecdotes. However, I did not hear much about travel plans or Do-It-Yourself home projects.

Mobility is picking up across the nation. According to the Transportation Security Administration (TSA), passenger throughput is roughly 15 times more than its nadir. And nearly thrice the daily numbers from a few months back.

Yet, for many people, travel still seems like a distant goal. The pace at which mobility picks up will be tied, in part, to the success in vaccinating the remaining population. Even with a recent pickup in mobility, passenger throughput remains roughly half of what it was at this time in 2019.  There is some tentativeness for safety concerns. Also, folks are concerned that their experience will be diminished due to a combination of testing and quarantining, and adhering to social distancing measures. Many people seem content, for now, just to get out of the house and see a movie and enjoy outdoor dining. Many are looking forward to Tanglewood’s limited engagements. A few are interested in heading to NYC in September for Broadway shows – but they’ll drive themselves and not corral into a train.

The stage is set for a flood of consumer buying, but there’s seemingly still some COVID-19 hesitancy. People are ready to buy, but it will take some time for them to comfortably break the shackles of the lifestyles they’ve unfortunately grown accustomed to over the last year. And, as I said, some can’t afford to. The result is good news for the stock market in general (money being pumped into investments) and for small-town restaurants and theaters.

I expect earnings for travel and gaming companies and commercial real estate to flounder over time. I wouldn’t rule out a good run for those types of stocks — some have done well in 2021 based on a snap-back and/or expectations as far out as 2022. However, I am not yet ready to load up on them with an allocation greater than market-weight.

I don’t expect much more, if any more, of those ARP checks to find their way into the stock market than the Deutsch Bank survey suggests. I’d consider that a maximum level of inflows. Why? Because people still think the stock market is rigged against them (and I’m not so sure they’re wrong). According to a recent study by Bankrate, the majority of Americans think the market unfair.

More than half of investors (55%) think the market is rigged against individual investors. Although that’s not the most prominent reason Americans are not invested in stocks. The biggest inhibitor is that they don’t have the money to invest in the first place.

That means we shouldn’t expect households on the downward slope of the “K” to put their money into the stock market. According to the Deutsche Bank survey, enough stimmies will be invested into the stock market to help prop enough valuations. It won’t be enough to usher in the dawn of a new rally like the one we saw in the back half of 2020. Too many people need to spend on essentials.

Stocks of consumer staple companies have lagged during the last year as large-cap tech stocks stole the show. The technology sector has performed marvelously. Unless the economy morphs into some new alphabetic shape, I expect to see a healthy rotation into more boring stocks, like those in the consumer staples sector.

“So it begins.” –Gandalf

The great rotation of our time? Investors leaving growth stocks and flocking to value stocks. Or so it seems (for probably about the twentieth time in the last decade).

I don’t have much more to add than I have in the past — I continue to prefer growth stocks over value stocks for equity-oriented investors. Still, I made some small trading changes last week that I wanted to share with you. My action reflects that, after a decade of chatter about the great rotation, I am more inclined to believe it now. Previous conversations about the likelihood of that rotation fell on deaf ears.

In a few tiny spaces, I shifted some large-cap growth broadly and technology stocks specifically into large-cap value stocks. I also placed some of the proceeds into high-yielding corporate bonds (aka junk bonds). But that’s not the news. That’s more “full disclosure” that I did something.

I don’t want to get too wonky here (e-mail me if you’d like to hear the wonk). The gist of it is that I rank investments to determine purchasing prioritization for new deposits. Conversely, I rank what should be sold first if a withdrawal is required. My re-ranking triggers no immediate action. I remain overweight in large-cap growth stocks. However, I acknowledge that, this time, the rotation from growth-stocks to value-stocks is more likely than anytime in the previous decade.

Allen Harris is the owner of Berkshire Money Management in Dalton, Mass., managing investments of more than $500 million. Unless specifically identified as original research or data-gathering, some or all of the data cited is attributable to third-party sources. Unless stated otherwise, any mention of specific securities or investments is for illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable. Full disclosures. Direct inquiries: email hidden; JavaScript is required.

This article originally appeared in The Berkshire Edge on April 5, 2021.