NEW YORK: Stocks sank on Wednesday after the bond market threw up one of its last remaining warning flags on the economy.
The yield on the 10-year Treasury briefly dropped below the two-year Treasury’s yield on Wednesday morning. It’s rare for short-term yields to rise above longer-term ones, and when it happens, market watchers call it “an inverted yield curve" and brace for the possibility of a recession hitting in a year or two.
The Dow Jones Industrial Average dropped as much as 475 points in the first few minutes of trading before recouping some of its losses.
Weak economic data around the world also unnerved investors, who flipped back into selling mode after driving a rally on Tuesday on hopeful signals that the US-China trade war may not be worsening so much.
Germany, Europe’s largest economy, shrank 0.1% in the spring from the first three months of the year due to the global trade war and troubles in the auto industry. Data from China also showed that factory output, retail spending and investment weakened in July for the world’s second-largest economy.
The S&P 500 fell 1.7%, as of 10am Eastern time, giving back all of the prior day’s jump after the US delayed some of the tariffs threatened on Chinese imports. The Dow lost 435 points, or 1.7%, to 25,841, and the Nasdaq composite lost 1.9%.
“The relief rally inspired by the Trump administration delaying tariffs on some Chinese imports was short lived—blink and you missed it," said Fiona Cincotta, senior market analyst at City Index.
Much of the market’s focus was on the US yield curve, which has historically been one of the more reliable recession indicators.
If all this talk about yield curves sounds familiar, it should. Other parts of the curve have already inverted, beginning late last year. But each time, some market watchers cautioned not to make too much of it. Academics tend to pay the most attention to the spread between the three-month Treasury and the 10-year Treasury, which inverted in the spring. Traders often pay more attention to the two-year and 10-year spread.