S&P 500 drops back to 3700 amid unrelenting stock selling

• The S&P 500 has dropped back to close to the 3700 mark, down around 4% from earlier weekly highs.
• Stocks are being sold amid fears about the ongoing coordinated retail trader attack on Hedge Fund short positions.

The S&P 500 slipped all the way back to below the 3700 on Friday, down roughly 2.5% at lows, though having managed to climb back above the big figure in recent trade. At lows, the index was down well over 4% from the all-time high levels of nearly 3870 hit earlier in the week. No sectors have managed to escape the selling.

Driving the day

It is difficult to pinpoint what the main driver of equity market downside has been on Friday. A culmination of concerns over the impact of vaccine delays and the spread of new Covid-19 strains, combined with ongoing angst about the potential fallout from the ongoing surge in retail trader interest in bidding up highly shorted small-cap stocks such as GameStop, Koss and more, seems the most likely explanation.

Note that Johnson & Johnson released their final vaccine trial results, which seems not to impact risk appetite too much at the time. Whilst the headline efficacy of the vaccine was not as high as the Pfizer or Moderna vaccines (average of 66% efficacy globally), and showed somewhat disappointing efficacy against the South African strain of Covid-19, the vaccine was 85% effective in preventing severe disease across all global testing regions. JNJ shares have dropped by nearly 5%, perhaps as a result of the lower than hoped for efficacy. Indeed, disappointment in the JNJ result might be weighing on the market more broadly.

Still, the vaccine is only one shot, it ought to further accelerate global vaccination efforts, and comes off the back of positive Novavax trial data released on Thursday after the US close. Given past experience (i.e. the market reaction to positive Pfizer and AstraZeneca vaccine news), one would have expected stocks to rally in wake of two promising vaccine candidates emerging, but clearly this has not been the case.

Vaccine delays which appear to be affecting the EU particularly badly and fears about insufficient vaccine efficacy against newer variants of Covid-19 (such as the South African variant) seem to have neutralised or even straight-up outweighed any optimism there might have been about the two latest vaccine data releases.

Amid what seems to have been a worse than expected end to 2020 and start to 2021 in terms of global economic activity amid a worse than expected resurgence in the virus in major developed markets, investors had already been downgrading their outlooks for global growth in 2021. The latest news on vaccines and Covid-19 strains will not help these forecasts.