Wall Street suffered its sharpest daily decline in months on 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.
Though 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 hardest hit 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.
The Stoxx Europe 600 index dropped 1.16 percent, and indexes fell in most European countries. Europe’s vaccine rollout is struggling to ramp up amid supply issues, raising concerns about when an economic recovery will return. Recent surveys have shown business confidence dropping in Germany and France, the eurozone’s two largest economies.
On Tuesday, the International Monetary Fund upgraded its outlook for the global economy this year but the recovery is expected to be uneven. The Washington-based institution said the economy would grow 4.2 percent in 2021; three months ago, it had predicted a 5.2 percent increase. It downgraded its forecast for the eurozone because of the increase in coronavirus infections and lengthy lockdowns.
Apple said its new iPhone 12 led to a 21 percent increase in sales in the most recent quarter, pushing the company past $100 billion in quarterly revenue for the first time.
The tech giant becomes the third American company to reach $100 billion in revenue in a single quarter, joining Walmart and Exxon Mobil. Analysts expect Amazon to join the club when it reports its latest quarterly results next week.
The company’s profits grew 29 percent to a record $28.8 billion from a year ago. Its sales were $111.4 billion. The results easily beat analysts’ estimates.
The strong quarter was fueled by Apple’s latest iPhones, which went on sale in October. Analysts and investors had anticipated a strong quarter for months because many iPhone owners had waited to upgrade their devices in order to buy the new iPhones, which work with faster 5G wireless networks. Apple said iPhone sales increased 17 percent to $65.6 billion, a sharp reversal from a 21-percent decline in iPhone sales the previous quarter.
The record results were the latest sign of the growing power and heft of the largest tech companies, which have only gotten bigger and richer since the pandemic began.
With more people relying on its products to work, learn and socialize online, Apple has been an undisputed winner, and investors have bought its shares accordingly. In August, Apple became the first American company to reach a $2 trillion valuation. On Wednesday, less than six months later, Apple’s market value was just shy of $2.4 trillion, making it by far the world’s most valuable public company.
Apple had a particularly strong quarter in China. It sales in what it terms its Greater China region, which includes mainland China, Taiwan and Hong Kong, grew by 57 percent to a record $21.3 billion.
Tesla on Wednesday reported its first full-year profit, a feat 18 years in the making.
The electric carmaker, which was founded in 2003, said it earned $721 million in 2020, compared to a loss of $862 million in 2019. The company made $270 million in the last three months of the year, up from $105 million in the same period of 2019.
The company’s fourth quarter earnings were below analysts’ expectations and Tesla stock fell about 4 percent in extended trading on Wednesday.
Tesla’s transformation from a company that lost large sums of money every year has been made possible in large part by rising sales in China and Europe and the addition of a fourth car, the Model Y, that appears to have become its top seller in the United States.
Tesla’s sales rose about 36 percent to 499,550 cars in 2020. The increase was fueled by a new factory in Shanghai that opened a year ago and is now starting to produce the Model Y as well as its predecessor, the Model 3. China is the world’s largest market for electric and conventional cars.
The company reported revenue of $10.7 billion in the fourth quarter, up 45.5 percent from the year-ago period. Its full year revenue climbed to $31.5 billion, up from $24.6 billion in 2019.
Elon Musk, Tesla’s chief executive, has suggested that the company could sell more than 800,000 cars in 2021 as it expands output at its Chinese plant and opens a third plant now under construction near Berlin. It is also building a factory near Austin, Texas, that is expected to begin churning out cars by the end of the year.
But the automaker is also facing several challenges. In Europe, Tesla is encountering increasing competition from Volkswagen, Renault, Hyundai, Daimler and other manufacturers that have introduced improved and more affordable electric cars.
While Tesla does not break out its sales by region or country, it appears that the company’s U.S. sales slowed in 2020, mainly because of the coronavirus pandemic. But the company has also seen Model 3 sales stall as Model Y deliveries have increased, according to data on new-car registrations from California, Texas and 20 other states analyzed by Cross-Sell, a market research firm.
Competition in the United States is heating up, too. Ford Motor recently started delivering the Mustang Mach E, an electric sport-utility vehicle, and Volkswagen says it will introduce an electric S.U.V., the ID.4, in March. Both are eligible for federal tax credits that no longer apply to Tesla cars, making them more affordable than the Model Y.
GameStop One-Week Share Price
Millions of amateur stock traders collectively are taking on some of Wall Street’s most sophisticated investors. They’ve piled into trades around companies that other investors had written off, pushing stock prices to stratospheric levels.
The main focus is GameStop, the troubled video game retailer. Its stock is up 1,700 percent this month, including Wednesday’s climb of 135 percent. AMC Entertainment rose 300 percent on Wednesday, and BlackBerry is up more than 275 percent this month.
The surging shares have become detached from the factors that traditionally help establish a company’s value to investors — like growth potential or profits. But the traders who are piling in probably aren’t thinking about those fundamentals.
Instead, they are part of a frenzy that appears to have originated on a Reddit message board, WallStreetBets, a community known for irreverent market discussions, and on messaging platforms like Discord. (One comment from WallStreetBets read, “PUT YOUR LIFTOFF DIAPERS ON ITS ABOUT TO START.”) Both Tesla’s Elon Musk and the billionaire tech investor Chamath Palihapitiya have encouraged the crowd via Twitter.
Egged on by the message boards, these traders are rushing to buy options contracts that will profit from a rise in the share price. And that trading can create a feedback loop that drives the underlying share prices higher, as brokerage firms that sell the options have to buy shares as a hedge.
As more traders snap up options, the brokers have to buy up more shares, driving the astounding rise in the company’s stock prices. GameStop began the year at $19 and ended trading on Wednesday at nearly $348.
Another reason the shares are rising so quickly is that, until recently, they were heavily targeted by big investors who bet the stocks would decline by taking on short positions. As the shares surge, the shorters also have to buy the stock in order to cut their losses, and that triggers a so-called short squeeze — a sudden spike in a share’s value.
Gabe Plotkin, the hedge fund trader whose Melvin Capital was shorting GameStop, confirmed to CNBC on Wednesday that he had exited his position after having to raise a $2.75 billion bailout from Citadel and his former boss, Steve Cohen, amid the short squeeze. Mr. Plotkin’s other short bets appear to be suffering, possibly because they are being targeted by traders — Melvin and Mr. Plotkin are often pilloried on the message boards.
Jen Psaki, the White House press secretary, said Wednesday that the Biden administration’s economic team was “monitoring the situation” surrounding the volatile trading in some stocks.
Officials at the Securities and Exchange Commission and elsewhere are closely watching internet chat rooms for signs of potential market manipulation, though they can do only so much without clear signs of fraud. If a big group of traders simply decides to buy options on a stock at the same time, out in the open, proving malfeasance may be difficult.
Facebook on Wednesday reported surging profits and revenue driven by soaring ad sales, but cautioned that it might face “headwinds” in the future from regulation and technology changes.
The social network’s revenue in the fourth quarter grew to $28 billion, up 33 percent from a year earlier and beating Wall Street estimates. Profits totaled $11.2 billion, up 53 percent.
Facebook’s business rose even as it dealt with multiple controversies. It has been criticized for the proliferation of misinformation across its platform and the effects of those falsehoods on users, while regulators have grown increasingly concerned about its outsize power.
In December, the Federal Trade Commission and more than 40 states accused Facebook of buying up its rivals to illegally squash competition. This month, Facebook angered conservatives and others for banning the account of former President Donald J. Trump, citing his incitement of violence.
Even so, the company continued to attract new users. Facebook’s apps — which include Instagram, WhatsApp and Messenger — had more than 3.3 billion regular monthly users in the fourth quarter, a new high. About 2.6 billion of them used one of Facebook’s apps every day, the company said.
After an initial drop in advertising in March, Facebook’s business boomed as more people bought products online during the pandemic, executives said. The company said it expected that trend to continue.
“Despite the negative publicity and antitrust cases, it appears there is nothing that can stop what is arguably the world’s most important advertising platform,” said Jesse Cohen, a senior analyst at Investing.com.
Facebook said one area of uncertainty was potential regulation, especially in Europe. The company is closely watching rulings in Ireland that could prohibit it from transferring data on its European Union users to the United States. Executives also said they were concerned about changes that Apple was making to its mobile operating system, iOS, about the tracking of apps, which could hamper some of Facebook’s ad-targeting tools.
In a statement, Mark Zuckerberg, Facebook’s chief executive, was positive.
“We had a strong end to the year as people and businesses continued to use our services during these challenging times,” he said. “I’m excited about our product road map for 2021 as we build new and meaningful ways to create economic opportunity, build community and help people just have fun.”
The automaker formerly known as Fiat Chrysler has agreed to pay $30 million to settle a federal corruption investigation involving former executives and the United Auto Workers union.
Under the agreement, which is subject to approval by a federal judge, the company has agreed to plead guilty to one count of conspiracy to violate the Labor Management Relations Act.
The charge against Fiat Chrysler, which this month completed a merger with PSA, the French automaker and is now known as Stellantis, is part of a wider investigation into the union that has resulted in guilty pleas by more than a dozen senior union officials, including two past presidents.
The investigation by the U.S. attorney in Detroit found that a former top labor executive at Fiat Chrysler, Alphons Iacobelli, used hundreds of thousands of dollars of union funds to pay for a Ferrari sports car, other luxury goods and renovations to his 6,000-square-foot home. He pleaded guilty to federal charges in 2018.
The union reached an agreement with federal prosecutors in December on anticorruption reforms to avoid having the union put under government control. Two past union presidents, Dennis Williams and Gary Jones, are scheduled to be sentenced next month after pleading guilty to corruption charges.
When AT&T’s WarnerMedia group announced it would release “Wonder Woman 1984,” one of its most anticipated blockbusters, on HBO Max at the same time as it would in theaters, it sent shock waves throughout Hollywood.
But for AT&T, the reason in doing so was simple: drive HBO Max subscriptions. In its fourth-quarter earnings report, the phone giant said the strategy helped, boosting HBO Max customers to 17.2 million.
It’s not clear how many specific subscribers “Wonder Woman” helped to add. Box office dollars add more profit than streaming dollars, so the financial trade-off is also unclear.
But AT&T is banking on its new streaming platform to help drive overall growth. The mobile phone industry is saturated, creating a pitched battle between the top three players, which includes Verizon and T-Mobile. Offering HBO Max to higher-end phone customers as a freebie or at a discount helps keep customers from defecting to rivals.
The streaming world is also a tough battleground. Netflix has 204 million subscribers, with about 67 million of them in the United States. Disney+ attracted over 86 million worldwide about a year after it launched. HBO Max, which costs more than the others, has a long way to go before it catches up.
Fourth-quarter revenues for AT&T were flat at $36.7 billion, but higher costs associated with HBO Max ate into operating profits, which fell nearly 13 percent to $6.6 billion.
The rise of streaming also hurt AT&T’s more traditional pay-TV group, which includes satellite provider DirecTV. The division saw a loss of 617,000 customers in the quarter as the pandemic crippled household budgets and cord-cutting accelerated. The company also took a $15.5 billion write-down of its DirecTV unit, reflecting the declining value of satellite television. AT&T paid nearly $50 billion to acquire the company in 2015.
Boeing lost more than $11.9 billion last year, its worst year ever, as it struggled to overcome the crisis surrounding its 737 Max jet as it also endured the disastrous slowdown in global aviation caused by the coronavirus pandemic.
The company’s bottom line suffered especially during the final three months of the year, during which Boeing reported a loss of more than $8.4 billion. In that quarter, the company recorded a $6.5 billion charge related to the development of the 777X, a wide-body plane that has suffered several delays in recent years. On Wednesday, Boeing extended the plane’s expected arrival once more, to 2023, amid tightening certification requirements and weakening demand for large jets, which has been exacerbated by the pandemic.
Over the course of the year, Boeing brought in more than $58 billion in revenue, which was down 24 percent from 2019.
In a letter to staff, Boeing’s president and chief executive, Dave Calhoun, described 2020 as “a year of profound societal and global disruption, which significantly impacted our industry.”
The financial results were announced on Wednesday morning, shortly after aviation regulators in Europe approved the 737 Max to fly again, joining counterparts in Brazil, Canada and the United States. The Federal Aviation Administration became the first regulator to allow the Max to return to service in November, ending a global ban that had been in place since March 2019, after 346 people were killed in two crashes involving the plane.
Five airlines have resumed Max service, racking up more than 2,700 flights, according to Boeing. In the United States, only American Airlines is flying the Max, though United Airlines is expected to start using the jet next month, followed in the second quarter by Southwest Airlines.
Boeing has started making deliveries and collecting payments on the Max again, a huge relief for its commercial airplane business, which rests heavily on the 737 line. Still, the steep decline in travel caused by the pandemic has hurt Boeing’s airline customers, muting hopes for a recovery this year.