New highs close out winning week for top indexes

U.S. stocks finished the first week of February on a hot streak as investors cheered on robust corporate earnings and as extreme volatility surrounding GameStop and a collection of stocks that drew intense interest from Reddit and online trading communities evaporated.

The Dow Jones Industrial Average closed up 92.38 points, or 0.3%, to settle at 31,148.24 on Friday. The S&P 500 added 15.09 points, or nearly 0.4%, to 3,886.83, eclipsing the all-time high from Thursday, while the tech-heavy Nasdaq climbed 78.55 points, or nearly 0.6%, to 13,856.30, also a new high.

The five-day winning streak gave the three major U.S. indexes their best weekly performance since early November, with the Dow advancing nearly 3.9%, the S&P adding 4.7% and the Nasdaq gaining 6.1%.

Investors were undaunted by a disappointing employment report, which showed that the U.S. economy added a modest 49,000 jobs in January, signaling that the labor market continues to falter in the coronavirus pandemic. Slightly more than half of the 22 million jobs lost at the beginning of last year have been recovered.

Since Wall Street’s muscular gains of last summer, culminating in record high finishes for the year, the stock market has often seemed disconnected from the broader economy, which has been hit hard by the pandemic. That disconnect was amplified further as passionate traders inflated GameStop shares to record levels, despite its troubled business fundamentals.

“The stock market is as stretched as ever,” said James McDonald, chief executive of Hercules Investments. “Excess in company valuations are obvious, but now we are seeing extreme levels of margin borrowing and melt-ups in highly shorted or penny stocks. These are all signs of a market top.”

Robinhood, the popular online trading platform, announced Thursday that it had lifted all stock-buying restrictions on GameStop and the other sought-after names, including AMC Entertainment and BlackBerry.

GameStop shares closed up nearly 19.2% Friday, at $63.76. But the stock has been gutted in recent days. It shed 42% on Thursday and is down more than 80% since its close of $325 on Jan. 29. The losses followed spectacular gains last month, which drew in many new investors chasing the hype and potential profits. GameStop shares ballooned by 1,600% in January.

The astounding levels of trading provoked an alarmed reaction from brokerage firms and securities regulators. On Thursday, Treasury Secretary Janet Yellen met with officials from the Securities and Exchange Commission and the Federal Reserve, among others, to discuss the market turbulence. Regulators face growing concerns over the use of social media to potentially manipulate stock trading and other financial issues the GameStop saga has raised, including the adequacy of online brokers’ capital reserves and calls for greater scrutiny of hedge funds.

In the chaos last week, Robinhood and other trading platforms blocked investors from purchasing GameStop for a time, and then set limits to the number of shares customers could purchase. While Robinhood has said it restricted the stocks to follow rules on capital requirements, the moves triggered dramatic price drops for GameStop. Traders, members of Congress and business leaders have lashed out against Robinhood, which appeared to them as tying the hands of clients in the middle of a trading frenzy.