June 14, 2024

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Truly Business

Stocks Have Worst Daily Drop in Months

18 min read



‘The Path Ahead Remains Highly Uncertain,’ Powell Says

With economic recovery slowed by a resurgence of the coronavirus, Jerome H. Powell, the Federal Reserve chair, said the Fed would leave interest rates at near-zero and continue making large bond purchases.

My colleagues on the FOMC and I kept interest rates near zero and maintained our sizable asset purchases. These measures, along with our strong guidance on interest rates and our balance sheet, will ensure that monetary policy will continue to deliver powerful support to the economy until the recovery is complete. The path of the economy continues to depend significantly on the course of the virus. A resurgence in recent months in Covid-19 cases, hospitalizations and deaths is causing great hardship for millions of Americans, and is weighing on economic activity and job creation. Following a sharp rebound in economic activity last summer, the pace of the recovery has moderated in recent months, with the weakness concentrated in the sectors of the economy most adversely affected by the resurgence of the virus and by greater social distancing. The overall recovery and economic activity since last spring is due in part to federal stimulus payments and expanded unemployment benefits, which have provided essential support to many families and individuals. The recently enacted Coronavirus Response and Relief Act will provide additional support. Overall, economic activity remains below its level before the pandemic, and the path ahead remains highly uncertain. While we should not underestimate the challenges we currently face, several developments point to an improved outlook for later this year. Sufficiently widespread vaccinations would enable us to put the pandemic behind us, and return to more normal economic activities. In the meantime, continued observance of social distancing measures and wearing masks will help us reach that goal as soon as possible. The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved.

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With economic recovery slowed by a resurgence of the coronavirus, Jerome H. Powell, the Federal Reserve chair, said the Fed would leave interest rates at near-zero and continue making large bond purchases.CreditCredit…Al Drago for The New York Times

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.

The losses continued in the Asia-Pacific region in early trading on Thursday, though to a lesser extent, suggesting the losses could ease with the new day. Major indexes in Japan, China and Hong Kong were down more than 1 percent. Futures markets were suggesting Wall Street would open higher later on Thursday.

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.

GameStop One-Week Share Price

GameStop’s shares were one of the most actively traded stocks in premarket trading on Thursday as amateur traders continue to drive it higher, while collectively taking on some of Wall Street’s most sophisticated investors. They’ve piled into trades around companies — big and small — 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 about 40 percent in premarket trading, a much more moderate gain after trading platforms placed restrictions on the stock. But it’s already up 1,700 percent this month, including Wednesday’s climb of 135 percent, that has given the company an astonishing market valuation of $24 billion. AMC Entertainment rose 300 percent on Wednesday, and BlackBerry is up more than 275 percent this month.

Billions of shares were traded in Naked Brand, a clothing manufacturer, on Wednesday. Its share price rose from 39 cents to $1.38, a 252 percent gain. It was again one of the most traded stocks in premarket on Thursday, rising 110 percent, after being cited on a Reddit forum. The company had been trying to orchestrate its own turnaround and escape “penny stock” status to avoid being delisted.

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.

The Securities and Exchange Commission said Wednesday it is “actively monitoring” the volatile trading.

Point72, Steve Cohen’s hedge fund, has an investment in Melvin Capital, which maintained a big bet against GameStop.
Credit…Sasha Arutyunova for The New York Times

As shares of GameStop, the video game retailer, have surged amid a wave of speculative investment by small investors, Point72, the hedge fund run by the Mets owner Steve Cohen, has lost nearly 15 percent this year, according to a person with knowledge of the matter.

GameStop’s sudden rally — the shares jumped 135 percent on Wednesday alone and are up more than 1,700 percent this year — has taken a toll on some large investors who had bet against the stock. The losses at Point72, which manages nearly $19 billion in assets, stem in part from the firm’s investment in Melvin Capital, a hedge fund that had a massive bet against GameStop.

As the shares rose, Melvin was saddled with sudden losses and had to accept $2.75 billion in rescue capital from two outside investors. One of the rescuers was Point72, which already had roughly $1 billion under management with Melvin, said two people with knowledge of the relationship, and added $750 million to help stabilize Melvin this week.

Because Melvin was investing money on Point72’s behalf, Point72’s results have also been hurt by the recent turmoil, said those people.

Point72’s losses are the first clear indication of the ripple of effect of Melvin’s recent troubles, which have been a cause of concern for both Wall Street and the baseball community. Stocks faced their worst performance since October on Wednesday in part because investors are worried that other large funds could be facing losses as well.

And late Tuesday night, Mr. Cohen faced questions on Twitter over the potential impact of the Melvin losses on the Mets, which he purchased for about $2.5 billion in November.

“Why would one have anything to do with the other,” Mr. Cohen replied in a post on Twitter.

A spokesman for Mr. Cohen said he was not available for comment.

Retail stockbrokers placed restrictions on Wednesday on trading of GameStop, AMC Entertainment Holdings and other securities as the companies have become the center of a frenzy that has driven triple-digit spikes in their stock prices in recent days.

TD Ameritrade said it placed restrictions on certain types of trading activity on the companies “in the interest of mitigating risk for our company and clients.”

“We made these decisions out of an abundance of caution amid unprecedented market conditions and other factors,” said Alyson Nikulicz, a spokeswoman for TD Ameritrade, which is part of Charles Schwab.

She said the restrictions vary, depending on the security, but can include limiting certain types of transactions, including short sales — when investors bet on a stock’s decline by selling shares they don’t actually own.

Charles Schwab said shares of GameStop could no longer be traded on margin, meaning trades cannot be placed with money borrowed from the company. And Robinhood, the trading app that has made it easier for inexperienced traders to enter the market, said it wouldn’t allow margin trading of shares of both GameStop and AMC.

Charles Schwab also has “put restrictions in place on certain transactions” including for GameStop, AMC and the clothing retailer Express, said Michael Cianfrocca, a spokesman for the company.

“It is not uncommon for us to place restrictions on some transactions in certain securities in the interest of helping mitigate risk for our clients,” he said.

William F. Galvin, the Massachusetts secretary of the commonwealth, applauded TD Ameritrade’s decision to restrict trading and said he believed the New York Stock Exchange should go even further and pause trading on GameStop for 30 days.

“It is very clear to anyone looking at the numbers that the whole marketplace is being manipulated here,” he said.

Senator Elizabeth Warren, Democrat of Massachusetts, called on the Securities and Exchange Commission to more tightly regulate the stock market.

“For years, the same hedge funds, private equity firms and wealthy investors dismayed by the GameStop trades have treated the stock market like their own personal casino while everyone else pays the price,” she said in a statement. “It’s long past time for the S.E.C. and other financial regulators to wake up and do their jobs.”

The S.E.C. said it was “actively monitoring the ongoing market volatility” and “working with our fellow regulators to assess the situation and review the activities of regulated entities, financial intermediaries, and other market participants.” Reddit, where a forum of renegade traders has pumped up the trades, said it hadn’t heard from regulators.

Washington officials demurred when asked about the frenzy, with the White House press secretary saying that Treasury Secretary Janet Yellen and others “are monitoring the situation,” and Jerome H. Powell, the chairman of the Federal Reserve saying, “I don’t want to comment on a particular company or day’s market activity or things like that.”

Eric Bolling with Melania Trump. Mr. Bolling was hired by Sinclair TV in 2019.
Credit…Ethan Miller/Getty Images

Eric Bolling, a former Fox News personality whose weekly talk show for the Sinclair Broadcast Group showcased his friendly relationship with former President Donald J. Trump, is leaving the broadcasting network, he said on Wednesday.

Mr. Bolling said that he planned to return to television shortly, but that he would wait to share details about his new job until after his Sinclair program, “America This Week,” ends on Saturday. He is also starting a podcast next month with the former Green Bay Packers quarterback Brett Favre.

Hired by Sinclair in 2019 to expand its current-affairs programming, Mr. Bolling was one of a handful of conservative-leaning hosts granted interviews with Mr. Trump during his tenure in the White House. His show aired on Sinclair stations in dozens of local markets.

Sinclair gained attention for mandating that its affiliates air segments from pro-Trump commentators, including a former Trump campaign aide, Boris Epshteyn. In October, Sinclair was forced to edit an episode in which Mr. Bolling spread misinformation about the coronavirus and questioned the utility of lockdowns and face masks.

“Eric has decided to pursue other professional opportunities,” Sinclair said in a statement on Wednesday. “We wish Eric the best in his future endeavors.”

Mr. Bolling was a co-host of “The Five” on Fox News. He left the network in 2017 after denying allegations that he had sent lewd messages to colleagues. He later became a prominent national advocate for curbing opioid abuse after the death of his son, who had taken a pill laced with fentanyl.

Customers line up for the iPhone 12 in Beijing. Apple had its most profitable quarter ever, driven by the new iPhone and sales in China.
Credit…Wu Hong/EPA, via Shutterstock

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. Its 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.

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.

Facebook also said that it would no longer recommend political groups to users and that it was working on ways to reduce the amount of political content that appeared in users’ News Feeds. The actions were based on feedback from users, who said they didn’t want fighting about politics to be their entire Facebook experience, the company said.

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.

Gal Gadot in a scene from “Wonder Woman 1984,” which was released on HBO Max at the same time it hit theaters.
Credit…Clay Enos/Warner Bros. Entertainment, via Associated Press

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.

A Boeing 737 Max at Miami International Airport in December.
Credit…Joe Raedle/Getty Images

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.

Local businesses have been eviscerated by the pandemic.
Credit…Adria Malcolm for The New York Times

The economic upheaval caused by the pandemic is changing communities across the country. Hundreds of thousands of businesses have closed, leading to lost livelihoods and empty storefronts. Many of these businesses were neighborhood pillars, beloved locales that we returned to over and over again. In your neighborhood, perhaps the bar where you met friends after work, the restaurant where your family celebrated birthdays or the bookstore where you loved to browse is now gone.

The New York Times would like to hear from you about a local business that has shut down. Why was it special to you, and what do you miss about it? How is its absence altering the fabric of your community?

We may contact you with a few follow-up questions. And if you can, please share a photo of the business as well.

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