Amid signs of a recession, stocks take dive

Markets plunged Friday when a closely watched economic measure warned that sluggish global growth could tip the U.S. toward recession.

All three major stock indexes saw a steep decline on worries that a recession may finally be on the horizon after a 10-year bull market and economic expansion.

The Dow Jones industrial average dropped 460 points, about 1.8 percent, when the 10-year Treasury yield fell below the threeyear yield. The so-called “inverted yield curve” is a historic precursor of a recession.

Stocks posted their worst day since Jan. 3.

“It is freaking the stock market because an inverted yield curve has a history of predicting recessions,” said Ed Yardeni of Yardeni Research. “However, it is just one of the 10 components of the Index of Leading Economic Indicators, which remains on an uptrend.”

The Standard & Poor’s 500 stock index shed 1.9 percent. The Nasdaq composite fell 2.5 percent, its first drop in six sessions.

Dragging down the Dow were Nike, DowDuPont and Caterpillar. Dow utilities showed strength as investors flocked to safety.

Financial services, energy and industrials were the hardest-hit sectors in the S&P 500.

The yield on the 10-year Treasury is closely watched in the financial world because many view it as a window on where the economy is headed: up, down or sideways. Yields work inversely to a bond’s price.

When the 10-year yield is lower than the three-year yield, it tends to signal that people are locking up money longer term because they fear a slowdown in business profits and its accompanying decline in stock prices.

But not all yield-curve inversions signal a recession is in the offing.

The Federal Reserve sensed a slowdown in the past few months, putting interest rates on hold until the U.S. economy adjusts to a more rapidly decelerating global economy.

“The yield curve inversion, coming quickly after a dramatic ‘about face’ for the Fed, is undermining investor confidence,” said Kristina Hooper, global strategist at Invesco. “At the end of the day, we have to remember that an inverted yield curve doesn’t cause a recession; it’s just a good indicator that one is coming. Investors should not be panicking.”

The U.S. economy is still remarkably healthy. But weak manufacturing data out of Germany on Friday showed a third consecutive month of dwindling activity, feeding into investor fears of a worldwide recession. Germany has been the eurozone’s growth engine.

The financial services sector was down 2.6 percent Friday — pulling it down 4.7 percent for the week.

“Banks have a harder time making money in a low-interest rate environment, so they are getting hit the worst,” Silverblatt said. “They have fixed costs, and without higher interest rates, they have difficulty covering those costs.”