What’s happening: US stocks ended sharply lower on the last trading day of January, with the Dow Jones index and S&P 500 recording their worst month since October.
What happened: Last week was chaotic for Wall Street. It not only saw the S&P 500 and Nasdaq 100 reach record highs, but also included the worst day for the Dow Jones index and S&P 500 in the last three months.
US stocks remained highly volatile through the week due to heightened speculative trading by retail traders.
Why it matters: Last week, Wall Street witnessed the highest trading volumes in years. Investors were concerned about the massive spike and significant short squeeze in certain stocks, triggered by conversations among retail traders on Reddit.
GameStop came out of nowhere and grabbed the limelight. Although the company has been struggling, falling significantly behind the technological advancements of offerings by competitors, retail traders decided to buy its shares after messages on Reddit around the stock being shorted by institutional investors.
GameStop’s shares gained a whopping 400% last week and added more than 1,600% last month. Traders also focused on AMC Entertainment, sending its shares higher by more than 500% in January.
Trading volumes in the US stock markets climbed past 23.7 billion shares on Wednesday, exceeding the previous record set amid the financial crisis in 2008.
Various lawmakers have called for an investigation into the market frenzy through last week, and the SEC (Securities and Exchange Commission) is expected to step in.
“There’s way too much leverage in the system, and we’re starting to see signs that this excess leverage is going to be unwound in a way that will create headwinds for the stock market and other risk assets for more than just a few days,” said Matt Maley, chief market strategist at Miller Tabak.
Meanwhile, Johnson & Johnson released late-stage trial results from its covid-19 vaccine, showing an efficacy rate of 66%, much lower than that achieved by Pfizer and Moderna, while also being less effective on variants of the virus. On the other hand, Johnson & Johnson’s candidate is a single dose vaccine and provided protection against hospitalisations and deaths.
The Dow Jones index tumbled 620.74 points to close at 29,982.62 on Friday, settling below the 30,000 mark for the first time since December 14. The S&P 500 declined 1.9% to 3,714.24, with most sectors closing in the red. The Nasdaq 100 fell 2.09% to settle at 12,925.38 with shares of Apple and other big tech names declining on Friday.
All three major indices dipped more than 3% last week, notching their worst week since October. The Dow Jones index and S&P 500 lost 2% in January, while the Nasdaq 100 manged to end the month with 0.3% gains.
What to watch: Markets will keep an eye on volatility in the US stock market. As the stocks in focus are not constituents of the major stock indices, their influence remains limited.
“While we believe there is more pain to come we remain optimistic that it is likely to remain localized,” said Maneesh Deshpande of Barclays. “Market exposure of long-short hedge funds is relatively small, indicating little impact to the overall market due to deleveraging.”
Investors await a basket of economic reports from the US, including IHS Markit manufacturing PMI, ISM manufacturing PMI and construction spending. The IHS Markit manufacturing PMI is expected to rise to 59.1 in January, from 58.3 in December, while the ISM manufacturing PMI is projected to decline to 60 in January, from a previous reading of 60.7. Analysts expect construction spending to rise by 0.9% in December.