USA TODAY International Edition
Pessimism returns as Dow drops 799 points
So much for the all-clear sign on
Wall Street.
Just when it looked like the battered bull was healing, the Dow Jones Industrial Average suffered a drop of nearly 800 points Tuesday when the bond market sent an ominous signal: The yield on the two-year U.S. government bond rose above the interest rate paid out by five-year notes.
Why the pessimism over that obscure-sounding shift? Historically, when short-term rates rise above longer rates – which is dubbed an “inversion of the yield curve” – it signals an economic slowdown is coming.
“Investors are questioning whether the Treasury market is telegraphing a more material economic slowdown,” says Quincy Krosby, chief market strategist at Prudential Financial.
Fears of a coming recession weren’t the only thing worrying investors. Other fears that drove the Dow down 3.1 percent to 25,027 include: ❚ Fading glow of trade cease-fire: The optimism following the cease-fire on trade between the U.S. and China over the weekend at the G-20 summit lasted just one trading day. Now there’s rising skepticism about whether a deal between the world’s two biggest economies can be reached during the 90-day pause. That’s causing a lot of uncertainty for investors and is exacerbating worries about slowing growth, as tariffs result in higher prices for goods, which hurts sales and earnings of U.S. companies.
Wall Street says the lack of details following the meeting between President Donald Trump and counterpart Xi Jinping of China raises concerns about the world’s two largest economies being able to reach an agreement that would resolve the fight over tariffs, as well as other disputes. ❚ Stocks fall below key price floor: The broad Standard & Poor’s 500 stock index, which lost 3.2 percent, also fell below a key price level that suggests its long-term trend of rising prices might be coming under assault. The largecompany stock gauge dipped below its average price over the past 200 days, which prompted jittery investors to sell stocks more aggressively.
❚ Fed rate-hike fears: Last week, the Dow rallied more than 600 points after Federal Reserve Chair Jerome Powell suggested the central bank’s key interest rate was getting closer to a level that it is targeting. That was interpreted by Wall Street as a sign that the Fed would slow its interest rate hikes next year, rather than just raise borrowing costs on a preset path.
But the rise of short-term Treasury yields Tuesday above rates paid by longer-term government bonds sparked fresh fears that the Fed’s decision to boost borrowing costs have already caused damage to the economy.
Still, bond market experts say the key thing to watch is whether the twoyear Treasury yield climbs above that of the 10-year Treasury note. On Tuesday, the spread between the two-year and 10-year narrowed to within a tenth of a lpercentage point, its smallest gap since July 2007, Capital Economics says.