Week 4 in Brief
How did the major indices perform?
Stocks tumbled Friday, with the major indices booking their worst month since October, as an intensifying battle between retail traders and brokers over a batch of small, heavily shorted companies raised broader concerns about the recent market bubble, slow vaccine distribution, and delayed return to economic normality.
- On Friday, the Dow Jones Industrial Average slumped 620.74 points, or 2%, to close at 29,982.62, its lowest close since Dec. 14, 2020; the S&P 500 shed 73.14 points, or 1.9%, ending at 3,714.24; while the Nasdaq Composite tumbled 266.46 points, or 2%, finishing at 13,073.64.
- Meanwhile, the small-capitalization Russell 2000 index fell 1.6%, closing at 2,073.64.
- For the week, the Dow closed 3.2% lower, the S&P 500 down 3.3%, and Nasdaq Composite off 3.5%.
- For the month, the Dow lost 2%, the S&P 500 shed 1.1% and the Nasdaq Composite gained 1.7%.
What drove the markets?
- Short sales: Friday’s selling came as shares of some of the heavily shorted stocks that had become popular picks among a group of day traders who have been bidding up a handful of stocks— notably the ailing video game retailer GameStop — and forcing losses on big hedge funds.
- GameStop: GameStop shares rocketed higher by about 70% on Friday after nearly halving on Thursday. The stock closed at $65.01 per share a week ago, but by Friday’s close, was higher by more than 400% to $328.24 per share. GameStop shares rose on news that trading app Robinhood 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. Another target, AMC Entertainment, gained about 280% this week. For the rest of Wall Street, the worry is that the hedge funds will have to sell shares of other companies to cover their losses on GameStop and AMC — “forced liquidation.”
- This week, trading in these and other heavily shorted names generated historic trading volumes in equity markets, surpassing even the volume of trades taking place at the most volatile points of the pandemic in 2020. More than 23.6 billion shares of U.S.-traded stocks were exchanged on Wednesday this week, according to Bloomberg data, marking the most ever in records spanning back more than a decade.
- Coronavirus reports: Investors also expressed 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 announced that early data from a Phase 3 trial of its Covid-19 vaccine candidate appeared 66% effective in preventing moderate-to-severe disease 28 days after vaccination, but is less effective in dealing with the new South African strain.
- Economic data: Reports on U.S. economic activity came in better than expected, pointing to a tentative improvement in the economic landscape as investors await widespread vaccinations and lasting business reopening. Weekly unemployment claims dipped below 900,000 for the first time in three weeks, albeit while remaining at a historically elevated level. On Friday, new data showed that personal income rose more than expected in December, while consumer spending ticked down less than feared.
- Coronavirus stimulus: 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.
- Corporate earnings: Investors digested quarterly results from several large companies, including Microsoft, Apple, and Facebook, which reported profit and sales growth.
Stocks in focus
- Shares of heavily shorted stock Koss Corp. rose 52.5%, while those of AMC Entertainment Holdings rose 53.7%. The stocks closed at $64.00 and $13.26 respectively.
- Caterpillar Inc.’s shares fell 0.8% despite the maker despite better-than-expected profit for the fourth quarter and revenue that was in line with consensus.
- Eli Lilly & Co. shares fell 1%, despite the drugmaker surpassing Q4 profit and revenue expectations as it recognized $850 million in U.S. revenue for bamlanivimab, its treatment for mild to moderate COVID-19 that has been granted Emergency Use Authorization.
- Shares of Novavax Inc. surged 64.9% 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. The stock closed the week at $220.94.
- 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 slipped 2.5% Friday, closing at $193.25.
- Shares of Johnson & Johnson fell 3.6% after the company released Phase 3 data on its COVID vaccine, which showed an efficacy of 66%. Shares closed at $163.13.
How did the European markets perform?
- European stocks slid on Friday, recording their worst weekly performance since October as concerns around the slow rollout of COVID-19 vaccines mount, while a retail trading frenzy led to volatility on Wall Street.
- The pan-European STOXX 600 Index closed 1.9% lower, erasing all of January’s gains and ending the week down 3.1%. Germany’s DAX fell 1.7%, the UK’s blue-chip FTSE 100 dropped 1.8% and U.S. stocks fell more than 1% after underwhelming COVID-19 vaccine data from Johnson & Johnson.
- Economy-linked stocks of banks, insurers, miners, and oil & gas companies were among the worst-hit this week but Germany and Spain’s economies recorded growth in the fourth quarter, while the French economy contracted by a smaller than expected rate.
- Europe’s earnings season has been largely positive so far. Of the 8% of STOXX 600 companies that have reported, 78% have topped profit estimates, according to Refinitiv IBES data. Sweden’s Ericsson jumped 7.6% after reporting fourth-quarter core earnings ahead of market estimates on the back of strong sales of 5G equipment; Daimler edged up 0.9% after it said a strong fourth quarter helped it post better-than-expected 2020 group operating profit and that it was optimistic for 2021 while Swedish fashion retailer H&M fell 5.0% as it braced for a loss in the first quarter after full-year profits plummeted due to COVID-19.
How did Asian markets perform?
- Asian markets finished broadly lower on Friday with shares in Japan leading the region. The Nikkei 225 is down 1.89% while Hong Kong’s Hang Seng is off 0.94% and China’s Shanghai Composite is lower by 0.63%.
Commodities and other assets
- Oil prices slipped, with the U.S. benchmark down 14 cents to settle at $52.20 a barrel on the New York Mercantile Exchange.
- Gold futures 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 climbed 3.5 basis points to 1.09%, booking its largest monthly yield gain since October. Yields and bond prices move in opposite directions.
- USD was little changed on Friday while JPY sank to its lowest since mid-November as investors rebalanced portfolios for month-end.
- The ICE USD Index, a measure of the U.S. currency against a basket of six major rivals, was up 0.1% on Friday, at 90.57. The index is up 1.53% from a three-year low of 89.206 reached on Jan. 6. USD was last up 0.50% at 104.73 yen. It earlier rose to 104.94.
- Earnings season continues with more Big Tech earnings from Amazon, Alphabet, and Alibaba.
- A range of economic reports from the UK, Europe, and the US are also expected.
- Watch out for our Monday Weekly Market Outlook that provides insights on what’s coming up that week.