The threat of a recession doesn’t seem so remote anymore to investors in financial markets.
The yield on the closely watched 10-year Treasury fell so low Wednesday that, for the first time since 2007, it briefly crossed a threshold that has correctly predicted many past recessions. Weak economic data from Germany and China added to recent signals of a global slowdown.
That spooked investors, who responded by dumping stocks, sending the Dow Jones industrial average into an 800-point skid — its biggest drop of the year. The Standard & Poor’s 500 index slid nearly 3% as the market erased all of its gains from a rally the day before. Tech stocks and banks led the broad sell-off. Retailers came under especially heavy selling pressure after Macy’s issued a dismal earnings report and cut its full-year forecast.
Investors have been plowing money into the safety of U.S. government bonds for months amid growing anxiety that weakness in the global economy could sap growth in the United States. Uncertainty about the outcome of the U.S.-China trade war has spurred a return of volatility to the stock market in August — the Dow has dropped more than 5% and the S&P 500 is down more than 4%.
Economic data from two of the world’s biggest economies added to investors’ fears Wednesday. European markets fell after Germany’s economy contracted 0.1% in the spring because of the global trade war and troubles in the auto industry. In China, the world’s second-largest economy, growth in factory output, retail spending and investment weakened in July.
“The bad news for global economies is stacking up much faster than most economists thought, so trying to keep up is exhausting,” Kevin Giddis, head of fixed income capital markets at Raymond James, wrote in a report.
The S&P 500 fell 85.72 points, or 2.9%, to 2,840.60. The Dow sank 800.49 points, or 3%, to 25,479.42. The Nasdaq composite declined 242.42 points, or 3%, to 7,773.94. The Russell 2000 index of smaller-company stocks slid 43.05 points, or 2.8%, to 1,467.52.
The losses came the day after stocks rallied when the Trump administration delayed tariffs on about $160 billion worth of Chinese goods that were set to take effect Sept. 1.
President Trump took to Twitter to defend his trade policy Wednesday, saying “we are winning big time, against China.” But many on Wall Street remain worried that the trade war may drag on through the 2020 U.S. election and cause more economic damage.
Traders tend to plow money into ultra-safe U.S. government bonds when they’re fearful of an economic slowdown, and that sends yields lower. When longer-term Treasurys fall below shorter-term ones, economists call it an inverted yield curve. An inverted curve suggests that bond investors expect growth to slow so much that the Federal Reserve will soon feel compelled to slash short-term rates to try to support the economy.
In short, it’s a sign of economic pessimism.
The indicator isn’t perfect, though, and has given false signals in the past.
After its early decline, the yield on the 10-year Treasury stood at 1.58%, even with the yield on the two-year. Meanwhile, the 30-year Treasury yield also hit a record low Wednesday.
With bond yields falling, banks took heavy losses Wednesday. Lower bond yields are bad for banks because they force down interest rates on mortgages and other loans, which results in lower profits for banks. Citigroup shares sank 5.3%. Bank of America fell 4.7%.
Macy’s dived 13.2%, the sharpest decline in the S&P 500, after it slashed its profit forecast for the year. The retailer’s profit for the latest quarter fell far short of analysts’ forecasts as it was forced to slash prices on unsold merchandise. Macy’s grim results sent shares of other retailers sharply lower too. Nordstrom sank 10.6%. Kohl’s dropped 11%.
Energy stocks also declined sharply, hurt by another drop in oil prices, which were pulled down by worries that a weakening global economy will lower demand. National Oilwell Varco shares slumped 8%. Schlumberger shares skidded 6.6%.
The price of benchmark U.S. crude slid $1.87, or 3.3%, to $55.23 a barrel. Brent crude, the international standard, slid $1.82 to $59.48 a barrel.
Wholesale gasoline fell 6 cents to $1.68 a gallon. Heating oil declined 4 cents to $1.84 a gallon. Natural gas fell 1 cent to $2.14 per 1,000 cubic feet.
Gold rose $13.70 to $1,515.90 an ounce, close to a six-year high. Silver rose 29 cents to $17.25 an ounce. Copper fell 3 cents to $2.59 a pound.
The dollar fell to 105.88 yen from 106.68 yen. The euro weakened to $1.1137 from $1.1174.