Wall Street stocks suffer sharp declines
Wall Street suffered its sharpest daily decline in months Wednesday as investors awaited a number of earnings reports from large technology companies and as the Federal Reserve issued a glum assessment of the economy.
The S&P 500 and the Nasdaq Composite indexes fell 2.6 percent. The Dow Jones Industrial Average fell 2 percent.
After the S&P 500 rallied more than 16 percent in 2020, hitting record after record despite the economic damage caused by the pandemic, investors have grown concerned that financial markets have become detached from reality. And the sell-off came amid a speculative frenzy in some corners of the market that drove up shares of some mostly small, struggling companies.
Although the trading that grabbed Wall Street’s attention this week is only in a handful of stocks — including GameStop and AMC Entertainment — the level of speculation is reminiscent of trading during the dot-com bubble two decades ago. On Wednesday alone, GameStop rose 130 percent and AMC surged 300 percent.
Those gains, though, stood in stark contrast to a sell-off in the rest of the market. The S&P 500’s drop was its worst daily decline since late October.
Some market watchers said the two could be connected. The spiking shares are wreaking havoc for hedge funds and other large investors that had bet against companies like GameStop, which is expected to have lost hundreds of millions of dollars in 2020, and AMC, which is struggling as the pandemic keeps moviegoers home. To shore up their finances, those investors may have to sell large capitalization stocks.
On Wednesday afternoon, the Federal Reserve said it saw economic activity in the United States moderating, “with weakness concentrated in the sectors most adversely affected by the pandemic.”
“The ongoing public health crisis continues to weigh on economic activity, employment, and inflation, and poses considerable risks to the economic outlook,” the Fed said in a statement. It pledged to keep interest rates low and to continue buying bonds to support the flow of credit through the economy.
Shares of companies that have been hit hardest in the last year fared poorly: Retailers L Brands and Gap were among the day’s worst-performing stocks. Several airlines dropped, as did shares of other companies that have suffered from the shutdown in travel and tourism.
On Tuesday, the International Monetary Fund said the economy would grow 4.2 percent in 2021; three months ago, it had predicted a 5.2 percent increase.