MANHATTAN (CN) — Waves from the huge splash caused by retail investors’ run on GameStop shares continued throughout Wall Street on Friday, causing analysts to split on how long the phenomenon will last.
On Friday, the Dow Jones Industrial Average fell below the 30,000 mark, the first time the index has dipped below that threshold since mid-December. The Dow finished the day down 622 points, a 2% decline, and lost more than 1,000 points in total for the week.
The S&P 500 and Nasdaq were not immune from the turbulence. Both markets also fell sharply on Wednesday and were buoyed on Thursday, only to fall again on Friday. The S&P 500 lost 127 points for the week, while the Nasdaq shed 473 points.
Some experts remain worried about the frenzy and say it belies a bigger fragility in the current market.
“This week should be a wakeup call for all investors,” Kathy Lien, a managing director at BK Asset Management shortly before Friday’s closing bell. “The market disruption caused by retail traders swapping ideas over reddit and squeezing out major hedge funds is unprecedented, but corrections after record highs in stocks are not.”
She noted the many new milestones the Dow, S&P 500 and Nasdaq have ripped through on a nearly monthly basis in 2020 and early 2021 and said the sharp-sell off could lead to more volatility.
Others worry she may be right. “Fundamentals have nothing to do with this move by any stretch,” wrote James Vogt at Tower Bridge Advisors. “In fact, it shows the fragility of this market which can spill over into normal, high quality holdings.”
The turmoil began when a motley crew of retail investors and online pranksters began pumping the value of GameStop — whose share price has exploded from $20 per share to more than $340 in a matter of weeks. By the close of trading on Friday, the GameStop stock was trading at $308 per share, despite efforts by Robinhood and others to limit new buys.
GameStop’s gains came at the expense of several large hedge funds that had taken short positions, betting that GameStop’s stock was seeing a bubble and not priced accurately.
The run on GameStop and several other stocks caused U.S. indices on Wednesday to suffer their worst day in about three months, though markets recovered on Thursday as retail investor platforms curbed purchases of GameSpot, AMC Entertainment, and other highly volatile stocks.
On Friday, Securities and Exchange Commission Acting Chair Allison Herren Lee said in a statement the agency will look at all potential wrongdoing in the run.
The SEC will “act to protect retail investors when the facts demonstrate abusive or manipulative trading activity,” Lee said. However, it also will “closely review actions taken by regulated entities that may disadvantage investors or otherwise unduly inhibit their ability to trade certain securities.”
While the run has drawn the interest of regulators, lawmakers, and class-action attorneys, some financial institutions are sitting it out on how to deal with the issue.
In a conference call with reporters on Wednesday, Federal Reserve Chair Jerome Powell dodged questions about the GameStop fiasco, noting that the central bank has limited power to deal with the related bubble. “The connection between interest rates and asset values is probably something that’s not as tight as people think because a lot of different factors are driving asset prices at any given time,” he said.
Besides the excitement regarding GameStop, investors had the usual mash of economic data, some good and some bad.
Despite speculation in recent weeks that the Federal Reserve could accelerate its plans to increase interest rates, Powell told reporters the central bank had no plans to do so. “We are a long way from a full recovery,” he said, adding that inflation is still lower than the 2% target rate. “We have not won this yet.”