Markets plummet as bonds provide warning
Long-term yields slide amid trade-war worries
Is a recession coming? Wall Street sure thought so Wednesday.
The Dow lost 800 points, posting its worst percentage drop of the year while the Standard & Poor’s 500 and the Nasdaq each lost about 3%.
Worrying economic indicators from overseas coupled with an ominous signal in the bond market sent stocks into a tailspin.
“There was this realization that the rest of the globe is slowing faster than people expected, which leads to part two, the yield curve inverting for the first time since the financial crisis,” said Ryan Detrick, senior market strategist for LPL Financial. “That, historically, occurs ahead of a recession.”
Investors are worried about a mix of things, including the effect of the trade war between the United States and China, unrest in Hong Kong, uncertainty around the Brexit in Europe and the projected pace of interest rate cuts from the Federal Reserve.
Many factors weigh on the market, making it jumpy:
Bond troubles: Investors poured money into government bonds Wednesday, triggering a troubling sign: The yield on the 10-year Treasury dipped below the yield on the two-year one. That hasn’t happened since 2007 and historically signals an economic downturn is coming.
A similar scenario unfolded in the U.K.’S bond market Wednesday.
The yield on the 30-year Treasury bond hit a new low Wednesday at 2.04%, also a warning, said J.J. Kinahan, chief market strategist at TD Ameritrade.
“It shows that people are buying bonds as a protective mechanism,” he said.
Global slowdown: Stocks were poised for a sell-off even before the bell opened trading because two reports overseas renewed fears of a global economic slowdown.
Germany, Europe’s largest economy, reported that its gross domestic product, a measure of an economy’s health, went negative in the second quarter.
In China, the country’s industrial output in July hit a 17-year low, Detrick said. Retail sales and investment in real estate and other fixed assets weakened, an indication the world’s second-biggest economy is feeling pressure.
“We like a worldwide economy when it comes to buying cheap shoes,” Kinahan said. “But it’s a worldwide economy on the bad things, too. It can come onto our shores.”
Trade war: Underpinning these factors are the trade tensions between the U.S. and China, whose machinations have whipsawed markets.
Stocks rallied Tuesday after the Trump administration postponed some tariffs on Chinese imports until Dec. 15, instead of enacting them in September.
Still, that’s temporary, said Kathy Bostjancic, chief U.S. financial economist at Oxford Economics.