Dow Drops About 400 Points, Extending Selloff

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U.S. stocks tumbled again Friday as some investors continued to abandon the technology trade that had fueled the market’s recent rebound.

Big tech stocks weakened for a second consecutive day, pushing all three major stock benchmarks toward their biggest weekly losses in months. Investors appeared to be taking some profits after a big run-up in the stocks deemed to be beneficiaries of the coronavirus pandemic.

The Dow Jones Industrial Average dropped as much as 628 points but later pared its decline to about 290 points as some investors appeared to step into Friday’s dip. Shares of Apple,

Facebook,

Microsoft

and Amazon all remained down about 2% or more.

The S&P 500 fell 1.4%, while the tech-heavy Nasdaq Composite retreated 2.3%. All three indexes suffered on Thursday their biggest one-day drops since June.

The benchmarks were on track to finish the week in the red, snapping multiweek winning streaks for the S&P 500 and the Nasdaq. The broad index is down nearly 3% over the past five trading days, on pace for its biggest weekly loss since June, while the Nasdaq is off more than 4%, its biggest weekly decline since March.

The Dow, meanwhile, has fallen 2.3% this week.

Despite the declines, the three indexes all remain up more than 50% from the lows of March, with the S&P 500 trading at the same level it was at just a few weeks ago.

Some traders said dynamics in the options market may be partly to blame for the volatility, pointing to a recent jump in trading volumes of options linked to the shares of the top tech stocks.

Japan’s

Softbank Group

bought options tied to billions of dollars worth of individual tech stocks, The Wall Street Journal reported Friday. Analysts say that move has turbocharged the tech sector, whose sheer size drives broader market swings. Their dramatic rally in recent weeks has pushed the stock market to new highs, but raised concerns of a dangerous unwind that could drag the market down with them.

For some on Wall Street, the tech selloff appeared to come out of nowhere.

“The drivers are a little bit unclear,” said Justin Waring, an investment strategist in

UBS Group’s

global wealth-management arm, of tech’s retreat. Other than those stocks had run up more than most others, it wasn’t apparent why investors were now shunning a trade that had been favored throughout the pandemic, he added.

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The latest monthly jobs report seemed to factor little into Friday’s trading session. The report, which showed U.S. employers added 1.4 million jobs in August, wasn’t far off from economists’ expectations and did little to change the narrative around a drawn-out economic recovery.

“We are still moving in the right direction and the pace of the jobs recovery seems to have picked up, but it still looks like it will take a while,” said Tony Bedikian, head of global markets at Citizens Bank. “We continue to be optimistic that the economy has turned a corner and that we’ll continue to see steady progress.”

Nine of the 11 sectors of the S&P 500 were trading lower on the day, with industrial and financial stocks eking out small gains.

The Cboe Volatility Index, a gauge of expected turbulence in the S&P 500, rose nearly 5% and remained near its highest level since June.

Among individual stocks, shares of Apple slid 2.5%, while Facebook and Microsoft fell more than 3%.

Amazon.com

retreated 3.7%. All four stocks remain up sharply for the year, holding on to gains north of 30% since December.

The bout of volatility is unlikely to be the start of a downtrend, in part because institutional investors still have further room to boost their exposure to stocks, said Sophie Huynh, cross-asset strategist at Société Générale. “For now I think the selloff could be fairly limited,” she said.

Stocks also fell overseas. The Stoxx Europe 600 slid 1.1%. In Asia, Japan’s Nikkei 225 closed down 1.1%, South Korea’s Kospi Composite lost 1.2% and China’s Shanghai Composite fell 0.9%. Australia’s S&P/ASX 200 fell 3.1%, in its worst session since the start of May.

The pullback in stocks bears similarities to an earlier retrenchment in June, said Eli Lee, head of investment strategy at Bank of Singapore. He said he doesn’t see scope for a deep correction.

“In the longer term, low interest rates and the gradual recovery in the global economy will be supportive for risk assets,” Mr. Lee said.

Write to Joe Wallace at Joe.Wallace@wsj.com and Michael Wursthorn at Michael.Wursthorn@wsj.com

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