Stocks slide after bond market warns again of recession
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Stocks sank Wednesday after the bond market threw up one of its last remaining warning flags on the economy.

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File photo: VCG

The yield on the 10-year Treasury briefly dropped below the two-year Treasury’s yield 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.

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. 

“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 1.7%, as of 10 a.m. Eastern time, giving back all of the prior day’s jump. The Dow lost 435 points, or 1.7%, to 25,841, and the Nasdaq composite lost 1.9%.

Much of the market’s focus was on the U.S. 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.

Each of the last five times the two-year and 10-year Treasury yields have inverted, a recession has followed. The average amount of time is around 22 months, according to Raymond James’ Giddis.

The indicator isn’t perfect, though, and it’s given false signals in the past. Some market watchers also say the yield curve may be a less reliable indicator this time because technical factors may be distorting longer-term yields, such as negative bond yields abroad and the Federal Reserve’s holdings of $3.8 trillion in Treasurys and other investments on its balance sheet.

Macy’s plunged 17.9%, the sharpest loss in the S&P 500, after it slashed its profit forecast for the year. The retailer’s profit for the latest quarter fell short of analysts’ forecasts as it cut prices on unsold items.

Energy stocks also sank sharply, hurt by another drop in the price of crude oil on worries that a weakening global economy will drag down demand. National Oilwell Varco lost 5.3%, and Schlumberger fell 5.2%. The price of benchmark U.S. crude slid $1.94, or 3.4%, to $55.16 per barrel. Brent crude, the international standard, lost $1.87 to $59.43.

In overseas markets, Germany’s DAX dropped 2% following the weak German economic data. France’s CAC 40 fell 1.9%, and the FTSE 100 in London lost 1.4%.

In Asia, Japan’s Nikkei 225 rose 1%, the Kospi in South Korea gained 0.7% and the Hang Seng in Hong Kong added 0.1%.

For all its whipsawing up and down, the S&P 500 remains within 5% of its record, which was set in late July.