U.S. stocks jumped on Tuesday, building on a strong rally in the previous session as concerns about a speculative retail trading frenzy eased.
The Dow Jones Industrial Average climbed about 500 points, while the S&P 500 gained 1.4% after posting its best day since November Monday. The tech-heavy Nasdaq Composite popped 1.2%, bringing the week-to-date gains to nearly 4%.
The back-to-back advance on Wall Street coincided with a sharp reversal in GameStop, the video game retailer that captivated Wall Street with its massive short squeeze coordinated by a band of retail investors on social media. GameStop, fresh off a 400% rise last week, slid 30% on Monday and fell another 50% Tuesday. The stock has now lost more than half of its value in two days.
“The GME nonsense seems to be abating as the fever around that cohort of stocks starts to break,” Adam Crisafulli, founder of Vital Knowledge, said in a note.
Other highly speculative investments popular with the Reddit crowd also started to decline. AMC Entertainment dropped more than 30%. Futures contracts for silver, which enjoyed their biggest one-day jump in 11 years Monday, slid more than 5% Tuesday.
Some investors took it as a sign that the speculative mania from retail traders is unwinding, which is healthy for the overall market and investor confidence. The stock market suffered its worst week since October last week as many grew worried the wild trading activity in those heavily shorted names could be contagious and spill over to other areas of the markets.
Still, some believe this Reddit-fueled trading mania showed that the collective power of retail investors warrants extra attention.
“Retail investors are a force to be reckoned with,” said Lauren Goodwin, economist and portfolio strategist at New York Life Investments. “This precise example will fade, and retail investors’ influence will ebb and flow over time. But on a single-name basis, I think it would be prudent for investors to expect attention to flare for certain equities from time to time.”
Investors also awaited big earnings reports Tuesday, with tech giants Amazon and Alphabet set to release quarterly numbers after the market close.
The market has appeared to shrug off even some of the stronger quarterly reports this earnings season, and Ally Invest chief investment strategist Lindsey Bell said on “Closing Bell” that those movements may mean the good news was already priced in to stocks after a strong close to 2020 for equities.
“While these reports were not just good, they were better than expected and you would want to see the stocks move a little bit higher, it’s almost understandable that they haven’t,” Bell said.
Investors will also be following stimulus negotiations in Washington, where congressional Republicans made a counteroffer to President Joe Biden’s $1.9 trillion stimulus plan on Sunday.
Biden met with those lawmakers on Monday as congressional Democrats moved toward passing a reconciliation bill without bipartisan support. White House press secretary Jen Psaki described the meeting as “substantive and productive.”
