Shares in the United States rose on Friday, with S&P and Nasdaq indexing the highest weekly gains in the US election since early November, boosted by earnings optimism, stimulus talks and progress in vaccine launches.
The S&P 500 rose for the fifth straight session in the longest earnings series in August. The benchmark and the Nasdaq set record highs for the next day.
The Dow Jones industrial average rose 92.38 points, or 0.3 percent, to 31,148.24, the S&P 500 gained 15.09 points, or 0.39 percent, to 3,886.83, and the Nasdaq Composite added 78.55 points, or 0.57 percent, to 13,856.30.
For the week, the S&P 500 gained 4.65 percent, the Nasdaq added 6.01 percent and the Dow rose 3.89 percent. The low-capitalization Russell 2000 index rose 7.7 percent for the week, the highest weekly percentage gain since the week ended June 5.
But as the trading frenzy that has taken shares of GameStop Corp and other retail investors’ favorites on a wild trip, investors notice signs of potential market stress that could influence broader stock performance in the coming weeks.
For now, US equities appeared to outpace the rising volatility that led the S&P 500 to its biggest weekly decline since October last week, as strong gains, fiscal stimulus expectations and progress in vaccination efforts nationwide drive stocks to record highs.
Some investors, however, were concerned that wild fluctuations in GameStop shares and other “meme stocks” could have exacerbated concerns about market volatility and high valuations that could make investors more risk averse.
“Recent retail activity has been a concern for the wider market,” said Benjamin Bowler, head of global derivatives research at BofA Global Research.
The long-term liquidity on the S&P 500 dried up as market makers and other investors sought to reduce risk during the rise of GameStop, according to BofA analysts. Earlier this week, the bank’s “market fragility” peaked in March 2020, making US stocks extremely vulnerable to sudden market shocks, the company said.
The movements in the Cboe volatility index, known as the “fear gap” on Wall Street, also indicated that investors may be more sensitive to market turmoil than usual: last Wednesday, the index rose 14 points, March’s biggest one-day gain as the S&P 500 lost 2.6 percent.
The increase in the gauge was eight to 10 points higher than the expected move following such a decline in the S&P 500, according to Stuart Kaiser, a strategist at UBS. The oversized reaction, he said, indicates increased nervousness among investors who could suggest higher sales in the market in response to negative developments.
VIX has since returned to post-pandemic lows as US stocks rallied this week. Even so, “I wouldn’t say I’ve gone through it all yet,” Kaiser said.
Next week, investors will look for quarterly corporate results from Cisco Systems Inc, General Motors Co and Walt Disney Co, as well as US consumer price data.
For now, options markets are not even giving the green light.
Investor demand for calls to the S&P 500, accustomed to positioning itself for index gains, rose after falling to a low of several decades earlier this week, according to Charlie McElligott, general manager, cross-active macro strategy at Nomura. Rising demand indicates the risk of a pullback and a hectic trade in the coming weeks, he said.
In the longer term, several market analysts have said that the GameStop effect could be just a blip on the radar screen for markets as a whole. Decreases in VIX of 20 percent or more tend to be auspicious for equities, with the S&P 500 rising 2.6 percent a month later, according to Christopher Murphy, co-head of derivatives strategy at Susquehanna Financial Group.
However, the exuberance that increased the lines of error of the market has not completely disappeared. According to Trade Alert data, options activity showed a high demand for upward calls in the S&P Retail ETF, which includes GameStop, and the iShares Silver Trust, which was also influenced by retail trading.
As a result, some investors have stated that they intend to be careful for the time being, especially if they are exposed to passive funds holding a large number of small-cap stocks, which could be sensitive to a sudden retail frenzy.
“Time will tell if this has a more lasting effect on the market,” said Matt Forester, Lockwood Advisors’ chief investment officer. “We need to control our farms to make sure we are not overly exposed to these trends.”