Student Loan Forgiveness Won’t Spark Stock Buying Like ‘Stimmy’ Cash

  • The Biden administration is preparing to hand over $ 300 billion in student loan amnesty.
  • Unlike pandemic stimulus controls, retail investors are unlikely to use debt relief to rush into equities.
  • Individual investors now have to contend with hot inflation and collapsing asset prices.

The US government’s $ 300 billion student loan amnesty plan will provide financial relief to millions of Americans, but don’t expect a repeat of the “stimmy” boom of retail investors who used pandemic stimulus controls to charge. stocks and cryptocurrencies, insider market experts said.

“I don’t expect it to ignite a new rally in meme stocks. These are monthly payments that will cause some of those assets to flow into the market over time that otherwise would have gone to pay off the debt. I don’t think there is going to be a big wave of capital. that will flow into the markets, “Richard Smith, CEO of RiskSmith, a risk assessment tool for retail investors, told Insider.

President Joe Biden recently outlined the program that cancels up to $ 20,000 for some federal student loan borrowers. More than 43 million people will be eligible for the income requirements.

“While the effects of debt relief may help rekindle interest in highly speculative assets such as cryptocurrency or meme stocks by the younger generation, we believe the impact will be less than the distribution of government stimulus checks,” Marco Iachini, senior vice president of research at Vanda Research, said in comments sent by email. Vanda follows the retail investment business in the United States in single stocks and ETFs.

Debt relief “is likely to have a marginally positive impact on low- and middle-income consumers in the long run, but is unlikely to have a significant impact on the economy or stock market in the short term,” said Ross Mayfield, investment strategy analyst at Baird.

“Stimmy” phase.

Retail investors took the stock market by storm in 2021, making huge gains in meme stocks including GameStop, AMC Entertainment, and Bed Bath & Beyond. Many young people have used stimmy money to fight short hedge funds on such stocks.

Student debt relief applications will begin in October and approximately 8 million people will be processed automatically. During the pandemic, the government sent out three rounds of stimulus checks, and individual tax registrants received a total of $ 3,200 between April 2020 and March 2021 via checks or bank deposits.

“Those checks filled the cash accounts as soon as they hit citizen mailboxes,” Iachini said. From an implementation perspective, borrowers may not see the impact until late 2022 or early Q1 2023, she said.

The average monthly student loan payment is around $ 400- $ 500, including private loans compared to the stimulus impact of $ 3,200 per adult, Vanda said.

“It would therefore take on average about 6-8 months to achieve the same impact, while the eligible share of beneficiaries (% of the population) is lower than the broad scope of stimulus controls,” wrote Iachini.

According to a working paper written in March by a Harvard Business School economist and two finance professors from NYU’s Stern School of Business, released in March, about $ 100 billion of the total $ 800 billion from stimulus controls is arrived at the stock market.

The newfound money has spurred retail investors with millions of them stuck working from home or out of work due to COVID. Along with the meme stock craze, bitcoin rose to a record high of over $ 68,000 in November 2021.

Inflation bites

But retail investors are in a different position from 2021, when the S&P 500 was up nearly 27%. Shares have since plunged into a bear market. There has been a resurgence in the Bed Bath & Beyond-led meme stock business, but Vanda said speculative buying looks set to decline for the remainder of 2022.

Inflation will be a major reason why many borrowers do not reallocate payments of forgiven debt to stocks or cryptocurrencies.

“Over the past 12 months, the cost of everything they buy has risen: the cost of gasoline, the cost of food, the mortgage rates. So I suspect that some of that $ 300 billion will likely only be used to offset some of the cost. life increases, “David Sacco, a resident finance trainee at the University of New Haven’s Pompea College of Business, told Insider.

“People are more sensitive to risk because they have been burned,” Smith said. “Bitcoin is gone [down] to $ 19,000. Many risky bets that were very popular during the pandemic are down and people are underwater on those positions. ”

Repayments for federal student loans will resume in January 2023. A March survey conducted by Student Loan Hero found that 6% of respondents used outstanding redemption money to invest in the stock market, well below the 52% who did. used the money to pay rent and other household expenses.

“I believe whatever [debt-forgiveness] the money goes into the investment side, things will likely go into more traditional and safer investments, “Sacco said.

A chart shows the growing retail participation in the stock market since Covid and two large spikes in net flows that roughly coincide with pandemic controls.

A Vanda chart shows increasing retail participation in the stock market since Covid and two large spikes in net flows that roughly coincide with pandemic controls.

Vanda research

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