Dow tumbles 600 points as GameStop frenzy and vaccine news stress market

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Stock indexes tumbled Friday, putting the worst week since last October in view, amid concerns that volatile trade in a batch of small, heavily shorted companies may reflect a speculative bubble across the wider market, while the slowness of the coronavirus vaccine rollout created doubts about the speed of economic recovery.

What are major benchmarks doing?

  • The Dow Jones Industrial Average fell 444 points, or 1.5%, to around 30,159, but off session lows
  • The S&P 500 traded 51 points, or 1.4%, lower at 3,736.
  • The Nasdaq Composite Index fell 196 points, or 1.5%, near 13,139.
  • The small-capitalization Russell 2000 index was 1.7% lower at 2,070.

Stocks partially rebounded Thursday from the previous session’s tumble, with the Dow rising 300.19 points, or 1%. The S&P 500 also rose 1%, while the Nasdaq advanced 0.5%.

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For the week, the Dow and S&P 500, Nasdaq Composite all are on track for weekly declines of over 3%. The Russell 2000 is on pace for a weekly loss of about 4.5%.

The Dow was on track for a 0.6% monthly loss, while the S&P 500 was up 0.2% and the Nasdaq Composite was 2.2% higher.

What’s driving the market?

Stocks were under pressure again Friday, as surging prices on a small group of heavily shorted stocks continued to take oxygen out of the market as hedge funds covered short positions and reduced exposure to other stocks to reduce risk.

“It’s all anybody is talking about on the Street,” Michael Reynolds, investment strategy officer, Glenmede, told MarketWatch, adding, “We are not seeing the broader sentiment flashing red that would suggest this is moving beyond the broader market.”

GameStop GME shares were up 60% on Friday after trading app Robinhood said it would allow limited purchases of the stock. Robinhood restricted trading Thursday of GameStop and others caught up in a wave of buying by individual investors spurred on by a Reddit message board.

Robinhood late Thursday said it was raising more than $1 billion from its existing investors as it dealt with demands on its cash as a result of the trading frenzy, the New York Times reported. Before the capital raise, Robinhood drew on its credit lines to meet higher margin requirements from its central clearing facility for stock trades, known as the Depository Trust & Clearing Corp., the report said.

Charles Schwab & Co. and its affiliate TD Ameritrade reiterated that both firms adjusted margin requirements on select stocks to ensure clients had sufficient assets to pay for stock purchases, but weren’t restricting basic purchases of options or stocks. 

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Read: Peterffy calls Robinhood decision to allow ‘limited buys’ of GameStop troubling: ‘I’m not comfortable’

“The market has been distracted by the excess volatility in a handful of stocks that a week ago no one cared about,” wrote David Donabedian, chief investment officer of CIBC Private Wealth, in emailed remarks.

“The idea that individual investors can gang up on institutional investors is intriguing as is the debate over what should and shouldn’t be regulated,” the investment officer wrote.

Donabedian said that his firm is “staying focused on the fundamentals, not what low quality stock is soaring at the moment, and expect to see several positive factors emerge over the coming months.”

This comes as Washington has kept its eye trained on the situation. White House press secretary Jen Psaki on Friday deferred to the Securities and Exchange Commission when asked by reporters about the huge moves made this week by GameStop and others, as she said the federal government was working “how it should” to respond. 

Investors also have been parsing a wave of quarterly earnings reports and expressing concern that a recovery from the COVID-19 pandemic may take longer than hoped, as doubts grow about the rollout and effectiveness of new vaccines against more transmissible strains of the pathogen.

Johnson & Johnson  released early data from a Phase 3 trial of its COVID vaccine candidate, saying it appears 66% effective in preventing moderate -to-severe disease 28 days after vaccination, but is less effective in dealing with the new South African strain.

Daily new cases and hospitalizations from the third wave of the pandemic are beginning to fall across the U.S., but at least 165,073 new cases were reported on Thursday, according to a New York Times tracker, along with 3,862 deaths, although that was down from the more than 4,000 fatalities reported in the prior two days.

In economic data, a report showed Americans pulled back on spending in December, for the second month in a row, as a record increase in coronavirus cases opened fresh cracks in the economy and stunted the recovery.

U.S. Treasury Secretary Janet Yellen on Friday again called for quick Congressional action on the Biden administration’s proposed $1.9 billion coronavirus relief package, saying the measure was needed so Americans don’t lose the ability to meet their basic needs like shelter and food.

Meanwhile, the cost of employing the average U.S. worker rose 0.7% in the fourth quarter, but compensation still hasn’t returned to pre-pandemic levels, according to a closely followed measure of labor costs. Incomes rose by 0.6% in December, suggesting consumers still have money to spend once they regain confidence in the economy. A final reading of the University of Michigan’s January consumer sentiment index came in at 79, versus expectations to hold steady at 79.2.

“In the short run, there’s been some softness in the datapoints. Labor markets are feeling a little bit less good, though nothing terrible,” Steve Chiavarone, portfolio manager and equity strategist at Federated Hermes. told MarketWatch.

“If nothing else was going on,” Chiavarone said, “Investors probably would be buying the dip.” Instead, investors remain skittish about what will happen in equities over the shorter term, he said.

Which companies are in focus?

  • Shares of heavily shorted stock, Koss Corp. were up about 60%, while those of AMC Entertainment Holdings rose 52%.
  • Dow component Caterpillar Inc. shares fell 0.3% despite the maker of mining and construction equipment posted better-than-expected profit for the fourth quarter and revenue that was in line with consensus.
  • Eli Lilly & Co. shares fell 1.1%, despite the drugmaker surpassing fourth-quarter profit and revenue expectations as it recognized $850 million in U.S. revenue for bamlanivimab, the drugmaker’s treatment for mild to moderate COVID-19 that has been granted Emergency Use Authorization.
  • Shares of Novavax Inc. surged 65% after the company late Thursday said studies showed its proposed COVID-19 vaccine was nearly 90% effective overall, but much less effective against a new variant.
  • Juniper Networks Inc. shares were down 4.8% after the computer-networking company hit earnings expectations and topped revenue forecasts.
  • Visa Inc. late Thursday beat earnings and revenue expectations amid strong debit-card and online-shopping trends, and announced a new $8 billion buyback program. Shares of the company slipped 1.6% Friday.
  • Shares of United States Steel Corp. edged 3.9% lower after the steel producer reported a better-than-expect performance on a key profit metric for the fourth quarter.
  • Shares of Johnson & Johnson fell 3% after the company released Phase 3 data on its COVID vaccine, which showed an efficacy of 66%.

How are other assets doing?

  • Oil prices slipped, with the U.S. benchmark CL.1, +0.40% down14 cents to settle at $52.20 a barrel on the New York Mercantile Exchange. Gold futures GC00, +1.27% rose $9.10, or 0.5%, to settle at $1,850.30 an ounce, logging its first gain in 7 sessions.
  • The yield on the 10-year Treasury note TMUBMUSD10Y, 1.077% climbed 4 basis points to 1.09%. Yields and bond prices move in opposite directions.
  • The ICE U.S. Dollar Index DXY, +0.07% a measure of the U.S. currency against a basket of six major rivals, was up 0.1%.
  • The pan-European Stoxx 600 stock index SXXP closed around 1.9% lower, while London’s FTSE 100 UKX, -1.24% declined 1.8% on the day.
  • In Asia, stocks, the Shanghai Composite SHCOMP, -0.63% fell 0.6%, Hong Kong’s Hang Seng Index HSI, -0.94% shed 0.9%, and Japan’s Nikkei 225 index NIK, -1.89% retreated by 1.9%.

William Watts contributed reporting

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