Market Snapshot: U.S. stocks book worst daily losses since October as Powell stresses long road to recovery and short squeeze drama plays out

How did major benchmarks perform?

• The Dow Jones Industrial Average DJIA, -2.05% skid 633.87 points, or 2.1%, to close at 30,303.17, posting its longest losing streak since Friday, February 28, 2020 when the market fell for seven straight trading days
• The S&P 500 SPX, -2.57% shed 98.85 points, or 2.6%, ending at 3,750.77.
• The Nasdaq Composite COMP, -2.61% fell 355.47 points, 2.6%, to finish at 13,270.60.
• Wednesday marked the worst day of losses for all three major indexes since Oct. 28, 2020 on a point and percentage basis, according to Dow Jones Market Data.
• For the year the Dow is now down 0.99%, the S&P 500 down 0.14% and the Nasdaq is up 2.97%

Stocks ended Tuesday’s choppy session with small losses, with the Dow, S&P 500 and Nasdaq each declining 0.1%. The Dow fell for a fourth straight session, while the Nasdaq broke a five-day win streak. Both the Nasdaq and S&P 500 had closed at records on Monday.

What drove the market?

There were no surprises from the Fed on Wednesday, which opted to hold interest rates steady near zero and left unchanged its massive bond-buying program, following its first policy meeting of 2021. But it still was another day of volatile trading in U.S. equities.

Fed Chair Jerome Powell stressed that the economy remained far from a recovery, but also underscored that recent asset gains have been driven largely by optimism about the rollout of vaccines to combat the coronavirus pandemic, as well as by fiscal policy, and not necessarily by accommodative monetary policy.

Even after being asked several times during an afternoon press conference, Powell refused to comment on GameStock’s wild trading action, which surged another 121% Wednesday, saying the central bank broadly keeps an eye on valuations and financial stability, along with unemployment and inflation.

“They have kept rates near zero for the unemployment part of their mandate,” said Zhiwei Ren, a portfolio manager at Penn Mutual Asset Management, and its lead quantitative research and derivative hedging, on the Fed’s efforts to bolster the economy through the pandemic.

The Fed update comes as investors fret about a sudden price surge in shares of GameStop and a handful of other companies that appear to be caught in the crosshairs of a short squeeze battle between individual investors and hedge funds who have had to sell better known names to cover loss on their short positions.

See: GameStop and AMC stocks soar on another day of wild trading in heavily shorted companies

Shares of AMC Entertainment Holdings Inc. AMC, +301.21%,  BlackBerry Ltd.  BB, +32.66%,  headphone maker Koss Corp.  KOSS, +480.00% and retailer Express Inc.  EXPR, +214.14% have all experienced sharp moves without any apparent news to act as a driver, while facing a large amount of bets against them.

In response, a few major brokerage houses on Wednesday moved to restrict trading in shares of some companies subject to frenetic price surges and buying by individual investors on social-media platforms.

Read: GameStop, AMC trading is now being restricted at TD Ameritrade, Schwab

But Ren also said he’s keeping his eye on potential asset bubbles forming because of extra government spending and loose monetary policy to combat the crisis, calling the trend of individual investors banding together online “like a revolution.”

“I’ve read the posts, they are well-informed. You can tell they have done their homework,” he said.

Mark Stoeckle, chief executive officer at Adams Funds, told MarketWatch that he thought much of the day’s volatility was being driven by “the short selling community being squeezed.”

“You can argue about whether that makes sense, but at the end of the day, there’s a big short squeeze on a number of stocks.”

CNBC reported that hedge fund Melvin Capital had exited its short position in GameStop at a hefty loss. Citron Research’s Andrew Left, in a YouTube video, said he exited the bulk of his short positions in the stock. Some hedge funds were also reported to be selling other positions to cover losses on short positions.

Investors remain concerned that speculative behavior may be a sign the market is overvalued and a pullback could be near.

“The other side is that it’s impacting stocks that really don’t matter,” Stoeckle said, speaking to the small size of shares available from GameStop and others caught up in the frenzy, relative to the broader stock market.

“Everybody wants to drive slowly past the train wreck,” he said.

Though the trend for major U.S. stock indexes has been largely up in recent weeks, in line with mostly positive corporate results, declining coronavirus cases, and expectations for more fiscal stimulus by Congress, stock indexes have seesawed back and forth over the past few weeks, with volatility, as measured by the CBOE Volatility Index VIX, +61.64%, up sharply, noted Don Calcagni, chief investment officer for Mercer Advisors.

“The options market might be pricing in some sort of disappointment around another rescue package,” Calcagni said in an interview. “Ultimately, everything comes back to COVID. That’s the number one macro issue that has to get resolved. We need to see the Biden administration’s plan for vaccine distribution.”

Investors also continued to sift through a heavy round of corporate earnings, including results from Microsoft Corp. MSFT, +0.25%, which reported strong results late Tuesday. Updates from Facebook Inc. FB, -3.51%, Apple Inc. AAPL, -0.77% and Tesla Inc. TSLA, -2.14% are due after the closing bell Wednesday.

In economic data, U.S. durable goods orders increased for the eighth month in a row, but orders excluding transportation were up 0.6%, less than economists had forecast.

Related: Financial markets are complacent and exuberant — a formula that raises risk of correction, IMF warns

Which companies were in focus?

• Microsoft MSFT, +0.25% shares eked out a 0.1% gain, after the company’s results easily topped expectations late Tuesday, with the software giant surpassing $40 billion in sales and $15 billion in profit in a quarter for the first time.
• Shares of Advanced Micro Devices Inc. AMD, -6.20% slumped 6.2%, even after the chip maker topped $3 billion in quarterly revenue for the first time, and delivered results and outlook that both beat Wall Street expectations.
• Shares of coffee retailer Starbucks Corp. SBUX, -6.51% tumbled 6.5% after reporting mixed results Tuesday afternoon.
• Walgreens Boots Alliance WBA, +4.05% shares rose 4.01% after the pharmacy chain late Tuesday said it had tapped Starbucks executive Roz Brewer to serve as its new chief executive.
• Shares of Bed Bath & Beyond Inc., BBBY, +43.45% another favorite of short-squeezers, shot up 43.5%, or an 197.8% gain so far this month.
• Shares of Boeing Co.  BA, -3.97% fell 4% after the aerospace and defense giant reported a fourth-quarter loss that widened to more than $8 billion. 

How did other markets do?

• Oil prices closed higher, with the U.S. benchmark CL.1, +0.08% up 0.5% settling at $52.85 a barrel on the New York Mercantile Exchange. Gold futures GC00, -0.45% lost 0.2% to settle at $1,844.90 an ounce, a fifth down day in a row.
• The yield on the 10-year Treasury note TMUBMUSD10Y, 1.016%   was down about 2.5 basis points to 1.014% as traders pivoted away from riskier assets. Yields and bond prices move in opposite directions.
• The ICE U.S. Dollar Index DXY, +0.45%   a measure of the U.S. currency against a basket of six major rivals, jumped 0.5%.
• The pan-European Stoxx 600 stock index SXXP, -1.16%   fell 1.2%, while London’s FTSE 100 UKX, -1.30%  slipped 1.3%.
• In Asia, stocks were mixed. The Shanghai Composite SHCOMP, +0.11%  edged up 0.1%, Hong Kong’s Hang Seng Index HSI, -0.32%   was 0.3% lower, and Japan’s Nikkei 225 index NIK, +0.31%  gained 0.3%.

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William Watts contributed reporting