Stock benchmarks headed sharply lower Friday morning, amid fears that sharp gains in a batch of small, heavily shorted companies could force hedge funds to liquidate profitable long positions in other equities.
Investors also were parsing a wave of earnings reports and expressing growing worries 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.
What are major benchmarks doing?
The Dow Jones Industrial Average
fell 264 points, or 0.9%, to 30,333.
The S&P 500
traded 26 points, or 0.7%, at 3,760.
The Nasdaq Composite Index
fell 85 points, or 0.6%, to around 13,251.
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%.
What’s driving the market?
Investors were set to wrap up a hectic week of earnings reports, including results from several technology heavyweights, but those results were often overshadowed by a battle between individual investors and short sellers over a handful of stocks, particularly GameStop
GameStop shares were up sharply in premarket trade early 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.
Read: Peterffy calls Robinhood decision to allow ‘limited buys’ of GameStop troubling: ‘I’m not comfortable’
“The markets are clearly concerned that the general clearing system could come under risk of fracture if these bull raids persist unabated and U.S. legislators have already called for hearings into the matter,” said Boris Schlossberg, managing director at BK Asset Management, in a note.
But others argued that any bouts of forced liquidation by hedge funds suffering losses on short positions would likely blow over.
“It is crucial to stress that nothing has changed in the big picture. The elements that drove equity markets to record highs and stratospheric valuations are still in play,” said Marios Hadjikyriacos, investment analyst at XM, in a note.
“Vaccines are being rolled out, central banks are all-in, America is about to go on a federal spending spree, and the Biden administration will probably unleash even more if anything goes wrong,” he said.
In U.S. economic reports, the cost of employing the average U.S. worker rose 0.7% in the fourth quarter, but compensation still hasn’t return to pre-pandemic levels, according to a closely followed measure of labor costs. Wages—some 70% of employment costs—increased 0.9%, the government said Friday. Benefits rose 0.6% in the fourth quarter.
The Employment Cost Index for the fourth quarter was expected to rise 0.5%.
Separately, a report on spending showed that Americans cut outlays 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.
Consumer spending sank by 0.2%, the government said Friday. Meanwhile, incomes rose by 0.6% in December, suggesting consumers still have money to spend once they regain confidence in the economy Economists surveyed by MarketWatch, on average, look for personal income to show a 0.1% rise, while spending was expected to drop 0.4%.
The PCE price index, the Federal Reserve’s preferred inflation gauge, rose 0.4% in December. A separate “core” measure that strips out food and energy also moved up 0.3%. The data set’s measure of core inflation, the was expected to show a monthly rise of 0.1%.
Meanwhile, in a solid showing, the January Chicago Purchasing Managers Index, came in well above expectations at 63.8, but had been estimated to come in at 58.5 from 59.5.
A final reading of the University of Michigan’s January consumer sentiment index at 10 a.m. is forecast unchanged at 79.2. The December pending home-sales index, also due at 10 a.m., is expected to fall 0.2%.
Which companies are in focus?
Shares of GameStop were up 78%, while those for AMC Entertainment Holdings
were up nearly 60% after Robinhood released some trading restrictions on the companies which have been the source of speculative interest.
Shares of Dow component Caterpillar Inc.
were up 0.4% after 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 rose 1.7% after the drugmaker surpassed 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 45% 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 3.4% after the computer-networking company matched earnings expectations and topped revenue forecasts.
late Thursday beat earnings and revenue expectations amid strong debit-card and online-shopping trends, and announced a new $8 billion buyback program. Shares rose in premarket trade. Shares of the company slipped 0.2% early Friday. X
Shares of United States Steel Corp.
were up more than 4% after the steel producer reported a better-than-expect performance on a key profit metric for the fourth quarter.
Shares of Johnson & Johnson
were down 3.8% after the company released Phase 3 data on its COVID vaccine, which showed an efficacy of 66%.