By Anna Hirtenstein

U.S. stocks fell as retail investors buoyed GameStop and other shares, pointing to a volatile end to 2021's first month of trading.

The S&P 500 declined 0.6%, a reversal in direction after a nearly 1% rise Thursday. The Nasdaq Composite retreated 0.4% while the Dow Jones Industrial Average slipped 0.7%, or 210 points.

Shares of GameStop soared over 100%, after closing down 44% Thursday. AMC Entertainment was up more than 80%. Robinhood Markets, a popular venue for online traders, said late Thursday it would reinstate some trading in stocks that it had curbed earlier. American Airlines climbed 2.4%.

"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.

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 7.5% Friday and is up over 42% 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 impact 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 1.6% premarket after reporting a loss for the fourth quarter. Skyworks Solutions, a chip maker that supplies Apple, rose close to 15% after it reported earnings after hours Thursday that beat analysts' estimates. Its board also approved a $2 billion share buyback. Eli Lilly rose 4.8% 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.

Pharmaceutical company Novavax soared over 60% after it said its Covid-19 vaccine was 89% effective in a late-stage trial in the U.K. Johnson & Johnson fell 4.2% after saying its own vaccine was 66% effective.

Megacap tech companies slipped ahead of the opening bell. Microsoft fell 1.2%, as did Google's parent company Alphabet.

"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 close to 9% after posting earnings that beat estimates and said it had gained market share. Meanwhile, Nokia's shares listed in Finland rose 6%. 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 1.095%, from 1.055% Thursday.

Bitcoin gained over 15% to trade at $37,735. Tesla CEO Elon Musk mentioned the cryptocurrency in his Twitter account, writing "#bitcoin."

Write to Anna Hirtenstein at anna.hirtenstein@wsj.com

(END) Dow Jones Newswires

01-29-21 0947ET