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Dow tumbles 700 points amid GameStop mania, on pace for worst day since October

There are fears that the GameStop frenzy is a sign of a larger bubble in the market.
Image: Markets Remain Volatile As Platforms Block Trades Of Certain Stocks
The New York Stock Exchange on Jan. 28, 2021.Spencer Platt / Getty Images
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Stocks fell sharply on Friday as heightened speculative trading by retail investors continued to unnerve the market.

The Dow Jones Industrial Average lost 720 points, or 2.4 percent, to fall below the 30,000 mark. The 30-stock benchmark is on track to post its worst day since October. The S&P 500 fell 2.4 percent and the Nasdaq Composite slid 2.6 percent as Apple dropped 4.7 percent and other major tech names slipped.

Shares of GameStop jumped more than 70 percent after trading app Robinhood said it would allow limited buying of the stock and other heavily shorted names after restricting access the day before.

Robinhood raised more than $1 billion from its existing investors overnight, in addition to tapping bank credit lines, to ensure it had the capital required to allow some trading again in volatile stocks like GameStop.

Investors are concerned that if GameStop continues to rise in such a volatile fashion, it may ripple through the financial markets, causing losses at brokers like Robinhood and forcing hedge funds who bet against the stock to sell other securities to raise cash.

There are also fears that the GameStop mania is a sign of a larger bubble in the market and that its unraveling could also cause turbulence and hit retail investors hard. A number of lawmakers also called for an investigation into the chaotic trading. The Securities and Exchange Commission said Friday it will look into regulated body’s actions to uncover if the decisions made disadvantaged investors.

“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, new trial results from Johnson & Johnson’s coronavirus vaccine disappointed some investors, weighing on the broader market. Stocks had rallied to record highs on the hope that vaccines would be effective against Covid-19 to allow a smooth economic reopening before the end of the year. New mutations more resilient to vaccines could upend that rosy outlook for investors.

It’s been a volatile week on Wall Street. The Dow lost more than 600 points on Wednesday, suffering its worst sell-off in three months. Then the blue-chip benchmark rebounded by 300 points on Thursday amid a broad market rally.