Another bout of selling gripped the US stock market Friday, as anxiety mounts over whether the frenzy behind a swift, quick rise in GameStop and a handful of other stocks will damage Wall Street overall.
The S&P 500 dropped 1.9 per cent, giving the benchmark index its biggest weekly loss since October. The Dow Jones Industrial Average and Nasdaq each fell 2 per cent.
GameStop shot up about 70 per cent, clawing back much of its steep loss from the day before, after Robinhood said it will allow customers to start buying some of the stock again. GameStop has been on a stupefying 1,600 per cent run over the last three weeks and has become the battleground where swarms of smaller investors see themselves making an epic stand against the 1 per cent.
The assault is directed squarely at hedge funds and other Wall Street titans that had bet the struggling video game retailer’s stock would fall. Those firms are taking sharp losses, and other investors say that is pushing them to sell other stocks they own to raise cash. That, in turn, helps pull down parts of the market completely unrelated to the revolt under way by the cadre of smaller and novice investors.
The maniacal moves for GameStop and a few other formerly beaten-down stocks has drowned out many of the other issues weighing on markets, including the virus, vaccine distribution and potential aid for the economy.
“Our consideration is whether this is something that is a long-term influence or contained within a handful of companies,” said Tom Hainlin, a national investment strategist at US Bank Wealth Management.
Meanwhile, calls for regulators to step in are growing louder on Capitol Hill, and the Securities and Exchange Commission says it is carefully monitoring the situation.
“You’ve seen a lot of volatility this week, so when you have some unknowns like what you’re seeing in the retail trading world, people are a little concerned at record highs here and taking some money off the table,” said Megan Horneman, director of portfolio strategy at Verdence Capital Advisors.
The S&P 500 fell 73.14 points to 3,714.24. It ended the week with a 3.2 per cent loss, its worst week in three months. It ended January with a 1.1 per cent loss, its first monthly decline since October. The S&P 500 is still up 13.6 per cent since the end of October.
Some of the heaviest weights on the index were Apple, Microsoft and other tech stocks that have been big winners for professional and other investors over the last year.
The Dow lost 620.74 points to 29,982.62, while the tech-heavy Nasdaq composite slid 266.46 points to 13,070.69. The Russell 2000 index of smaller companies gave up 32.97 points, or 1.6 per cent, to 2,073.64.
Other forces also weighed on the market. Johnson & Johnson fell 3.6 per cent after it said its vaccine appears to protect against Covid-19, though not as powerfully as rivals. Analysts said the results, which would require one shot instead of the two required by other vaccine makers, were below expectations.
Elsewhere, investors watched virus infection spikes in Europe and Asia, renewed travel curbs and negotiations in Washington over President Joe Biden’s proposed $1.9 trillion economic aid package. Hopes for such stimulus for the economy have carried the S&P 500 and other major indexes back to record highs, along with enthusiasm about Covid-19 vaccines and the Federal Reserve’s pledge to keep the accelerator floored on its help for the economy. Low interest rates from the Fed can act like steroids for stocks and other investments.
“We are still moving towards a recovery from the pandemic, just a heck of a lot bumpier than anyone had expected,” said Stephen Innes of Axi in a report.
Wall Street’s focus remains squarely on GameStop and other moon shot stocks. AMC Entertainment jumped 53.7 per cent, and headphone company Koss vaulted 52.5 per cent. After their success with GameStop, traders have been looking for other downtrodden stocks in the market where hedge funds and other Wall Street firms are betting on price drops.
By rallying together into these stocks, they are triggering something called a “short squeeze.” In that, a stock’s price can explode higher as investors who had bet on price declines scramble to get out of their trades.
The smaller investors, meanwhile, have been crowing about their empowerment and saying the financial elite are simply getting their comeuppance after years of pulling away from the rest of America.
“I’ve been isolated throughout this entire pandemic and live in a state far from home or any sense of community,” one user wrote on a Reddit discussion about GameStop stock. “I’d kind of just… given up. These last few weeks I’ve started caring again; feeling impassioned again; wanting more again.”
Most of Wall Street and other market watchers say they expect the smaller-pocketed investors who are pushing up GameStop to eventually get burnt. The struggling retailer is expected to still lose money in its next fiscal year, and many analysts say its stock should be closer to $15 than $330.
In response, many users on Reddit have said they can keep up the pressure longer than hedge funds can stay solvent, although they often use more colourful language to say that.
This week, Robinhood and other online trading platforms restricted trading in GameStop and other stocks that have soared recently, prompting outrage from individual investors on Twitter and other social media sites. After easing up on some of the restrictions early Friday, Robinhood tightened them again throughout the day, limiting the number of GameStop shares that customers could buy. By 3.03pm Eastern time, customes could not purchase any more if they already had at least one share.
The Securities and Exchange Commission said Friday that it is evaluating “the extreme price volatility of certain stocks’ trading prices,” saying that such volatility can expose investors to “rapid and severe losses and undermine market confidence.”
Both the Senate Banking Committee and the House Financial Services Committee plan to hold hearings on the GameStop controversy.
