By Anna Hirtenstein and Paul Vigna 

U.S. stocks extended declines Friday as frenzied trading continued to drive GameStop and other heavily shorted shares, pointing to a volatile end to 2021's first month of trading.

The Dow Jones Industrial Average fell 2.1% to 29953 and the S&P 500 declined 2.1%, a day after rising nearly 1%. The tech-heavy Nasdaq Composite lost 2.2%.

If the losses held through the close of trading, the DJIA and S&P 500 would finish January in the red. The Nasdaq would have about a 1.1% gain. Ironically, that would comprise a month in which the DJIA set four new record highs, the S&P 500 set five, and the Nasdaq six.

Shares of GameStop jumped roughly 82% after closing down 44% Thursday. AMC Entertainment was up 73%. Robinhood Markets, a popular venue for online traders that had restricted trading in GameStop and AMC, said late Thursday it would reinstate some trading in stocks that it had curbed earlier.

The frenetic trading has caught the attention of lawmakers and regulators. On Thursday, both Rep. Alexandria Ocasio-Cortez (D., N.Y.) and Sen. Ted Cruz (R., Texas) took to Twitter to criticize Robinhood. On Friday morning, the Securities and Exchange Commission said it was reviewing the trading curbs by brokerage firms and was also on the lookout for potentially manipulative trading.

"The GameStop story, where you have retail investors that are a new actor on the market, [is] one that people cannot ignore," said Luc Filip, head of private banking investments at SYZ Private Banking. "There are some critical links for hedge funds that are short on those stocks." Those investors are selling other long positions to close out money-losing short positions, weighing down markets overall.

While it's hard to precisely measure social media's effect on politics and people's views, capital markets offer a unique backdrop, said Lindsey Bell, chief investment strategist at Ally Invest. "You can actually see it at work here in the stock market," she said.

That can make social media's influence seem more dramatic, she said. Still, most trading is controlled by institutional investors: "They have so much more money."

Stock markets have seesawed in January, buffeted by headlines about coronavirus vaccine supplies and tightened lockdown measures around the world. The Cboe Volatility Index, a gauge of stress in markets, rose 6.9% Friday and is up about 37% in January.

Consumer spending in the U.S. declined by 0.2% in December, according to data from the Bureau of Economic Analysis. It fell for the second straight month due to a rise in coronavirus cases, although a little less than economists had predicted. Household incomes rose 0.6%, which could prime the economy for growth later this year.

Gero Jung, chief economist at Mirabaud Asset Management, said he expected more prudence from consumers in the short term, which would affect the recovery, given that consumer spending makes up two-thirds of U.S. gross domestic product.

"But we also think there is some pent-up demand, which will increase consumption in the medium term," he said.

Earnings season continued Friday, with oil major Chevron falling 3.9% after reporting a loss for the fourth quarter. Skyworks Solutions, a chip maker that supplies Apple, rose 6% after it reported earnings after hours Thursday that beat analysts' estimates. Its board also approved a $2 billion share buyback. Eli Lilly fell 2.3% after it posted revenue and earnings that beat expectations and said it expected to make billions in revenue in 2021 from its Covid-19 treatments.

American Airlines, which on Thursday reported a record loss last year, fell 3.9%.

Pharmaceutical company Novavax soared 62% after it said its Covid-19 vaccine was 89% effective in a late-stage trial in the U.K. Johnson & Johnson fell 4.3% after saying its own vaccine was 66% effective.

Megacap tech companies slipped after the opening bell. Microsoft fell 2.3%. Google's parent company Alphabet fell 2%.

"Those hedge funds that have been hit, they'll have no choice but to get rid of some favorite holdings in order to raise that cash," to cover their short positions, said Seema Shah, chief strategist at Principal Global Investors, adding that she would see any further declines as a buying opportunity for tech stocks.

Overseas, the pan-continental Stoxx Europe 600 fell 1.3%. The European Union's comparatively slow rollout of vaccines and recent delays to supply are creating concerns about prolonged lockdowns and weighing on markets, investors said.

Swedish telecom Ericsson jumped 6.5% after it posted earnings that beat estimates and said it had gained market share. Meanwhile, Nokia's shares listed in Finland rose 3.9%. The cellphone company's U.S.-listed shares have been among those buffeted by retail investors in recent days.

In Asia, most major benchmarks declined. The Shanghai Composite Index edged down 0.6% and Japan's Nikkei 225 fell 1.9%. South Korea's Kospi index retreated 3%, in the biggest daily drop in five months.

In bond markets, the benchmark 10-year U.S. Treasury bond yield rose to 1.080%, from 1.055% Thursday.

Bitcoin gained 8% to trade at $36,129. Tesla CEO Elon Musk mentioned the cryptocurrency in his Twitter account, writing "#bitcoin."

Write to Anna Hirtenstein at anna.hirtenstein@wsj.com and Paul Vigna at paul.vigna@wsj.com

(END) Dow Jones Newswires

January 29, 2021 13:28 ET (18:28 GMT)