The selling came as Wall Street was consumed by the antics of 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.
The traders appear to be mostly small investors who are focused only on a handful of stocks. But they have emerged as a new risk factor for large firms that had bet against those companies with what are known as short sales. Short sellers lose money when a company’s shares rise, and the losses are potentially limitless, the NYTimes reported.
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GameStop’s shares gained 400 percent this week and over 1,600 percent this month. Short sellers who had bet against the stock are facing losses of as much as $19 billion in January, according to estimates from Ortex, a market data firm. Another target, AMC Entertainment, gained about 280 percent 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.” That selling was a factor in the stock market’s 2.6 percent drop on Wednesday, the S&P 500’s worst daily decline in three months, Mark Haefele, the chief investment officer at UBS Global Wealth Management, wrote in a note to clients on Friday.
It isn’t just GameStop that’s giving investors a reason to sell. They’re also concerned about the rollout of the coronavirus vaccine as countries begin to clamp down on supplies or warn of shortages. On Friday, the European Union announced plans to effectively halt any attempt by AstraZeneca to move vaccine doses manufactured in the bloc to other countries unless it first meets its supply obligations to the bloc’s 27 member states. Earlier in the week, Spain said it would have to partly suspend immunizations for lack of doses.
The trading Friday reflected some of these concerns. Shares of companies that are sensitive to concerns about the pandemic — including Norwegian Cruise Line, Delta Air Lines and the shopping mall owner Kimco Realty — were among the worst performers on the S&P 500.
But the conversation of the week focused on GameStop. And although the Securities and Exchange Commission and several lawmakers have said they’re watching the situation, it’s not yet clear how it will be addressed.
“The battle over GameStop is far from over, but there have been huge casualties,” Edward Moya, a senior market analyst at the trading firm OANDA, wrote in a note to clients on Friday. “A solution for this entire market dislocation will take time, and that could suggest this insane trading will continue a little while longer.”
The new focus on the market’s disconnect from fundamentals has come after stocks rallied more than 16 percent in 2020 despite the decimation of the economy and the human toll of the coronavirus pandemic. Many investors were already starting to raise concerns about the potential that financial markets had risen far too quickly after the Federal Reserve and lawmakers in Washington took unprecedented steps to shore up the economy and financial markets and as investors anticipated even more spending under a unified Democratic government.
To some investors, the week’s turmoil served only as a distraction from those positives. Even as stocks fell this week, several large companies, including Microsoft, Apple and Facebook, reported profit and sales growth. The selling Friday came even after Johnson & Johnson said that its one-dose coronavirus vaccine provided strong protection against Covid-19.
Mr. Haefele of UBS said he expected the “attention will likely shift back to earnings, stimulus, and the vaccine rollout,” and that when it does, stock markets will return to their gains, according to NYTimes.
— Mohammed Hadi and Eshe Nelson