As the trading frenzy that took shares of GameStop Corp and other favorites of retail investors on a wild ride recedes, investors are eyeing signs of potential market stress that could weigh on broader stock performance in coming weeks.
For now, U.S. equities appear to be looking past the upsurge in volatility that led the S&P 500 to its biggest weekly decline since October last week, as solid earnings, fiscal stimulus expectations and progress in country-wide vaccination efforts lead stocks back to record highs.
Some investors, however, worry that the wild swings in shares of GameStop and other “meme stocks” may have exacerbated concerns over market volatility and elevated valuations that could make investors more risk-averse.
“The recent retail activity was concerning for the broader market,” said Benjamin Bowler, head of global equity derivatives research at BofA Global Research.
Liquidity in futures on the S&P 500 dried up as market makers and other investors sought to reduce risk during the GameStop surge, according to BofA analysts. Earlier this week, “market fragility,” as measured by the bank, stood at its highest level since March 2020, making U.S. equities exceptionally vulnerable to sudden market shocks, the firm said.
Moves in the Cboe Volatility Index, known as Wall Street’s “fear gauge,” also indicate that investors may be more sensitive to market turbulence than usual: last Wednesday the index surged 14 points, its biggest one-day gain since March, as the S&P 500 lost 2.6%.
The fear gauge’s climb was 8 to 10 points greater than the expected move following such a drop in the S&P 500, according to Stuart Kaiser, strategist at UBS. The outsized reaction, he said, points to heightened jitters among investors that could suggest bigger market sell-offs in response to negative developments.