U.S. stocks tumbled at open Wednesday after the inverted yield curve, one of the most reliable indicators of a recession, sparked a new wave of investor fears, erasing the short-lived bump from Tuesday’s trade easing.
For the first time since 2007, the yields on short-term U.S. bonds eclipsed those of long-term bonds. This phenomenon, which suggests investors’ faith in the economy is faltering, has preceded every recession in the last 50 years. Recessions typically come within 18 to 24 months after the yield curve inverts, according to research from Credit Suisse.
“The 3-month Treasury bill to 10-yr note curve has been inverted for weeks now and with the inversion of the 2-yr to 10-yr curve. The stars are aligned across the curve that the economy is headed for a big fall,” Chris Rupkey, chief financial economist at MUFG Union Bank, said in an email. “The yield curves are all crying timber that a recession is almost a reality, and investors are tripping over themselves to get out of the way.”
The Dow Jones industrial average slumped nearly 400 points at open Wednesday, a day after it notched its best performance in two months. The Standard & Poor’s 500 index was down more than 1.4 percent and the tech-heavy Nasdaq was down more than 1.6 percent.
Bank stocks slumped off the news. Bank of America and Citigroup saw their shares sink more than 3 percent and JP Morgan’s shares fell 2.6 percent. Gold, a safe-haven for investors, rose. And the influx of investors scrambling for safety pushed U.S. 30-year Treasury yields to their lowest level ever.
Darkening skies overseas gave investors more to worry about. Germany announced Wednesday that its economy had shrunk, blaming the drop-off on the fallout from the U.S.-China trade war and the looming threat of a hard Brexit. The European Stoxx 600 benchmark was down nearly 6 percent in midday trading.
China reported more signs of a weakening economy Wednesday, with high unemployment and lower production and investment markers, fanning the flames of fears about a broader global slowdown as the protracted trade conflict appears to be stalling some of the world’s most powerful economies.
The spate of economic warning signs across the globe followed a rare moment of easing in the U. S-China trade war, after the White House announced Tuesday that tariffs on certain consumer goods like laptops, cellphones and toys would be postponed a few months to give shoppers and companies a break during the Christmas shopping blitz. Some of the tariffs on the remaining $300 billion in Chinese goods will still go into effect on September 1 as originally planned, while the items covered under the delay won’t be tariffed until December 15.
“Just in case they might have an impact on people, what we’ve done is delayed it so they won’t be relevant for the Christmas shopping season,” Trump told reporters Tuesday.
It was the first time President Donald Trump has publicly acknowledged that American people and businesses bear some of the burden from his tariffs.
The delay offered a glimmer of hope in an otherwise grim outlook in U.S.-China trade policy and was announced after a phone call between trade negotiators, which Trump lauded as productive. Chinese officials are planning to come to the U.S. in September to continue talks.
“The delay impacts around half of the $300 billion of imports and quite clearly focuses on popular consumer products that could have made the Christmas shopping period a lot more expensive for American consumers,” Craig Erlam, an analyst with OANDA, wrote in a note to investors Wednesday. “Trump’s decision to protect consumer’s from tariffs in such an important period makes a lot of sense, but it also recognizes that 2020 could become much more expensive for them if progress is not made.”
News of the tariff delay had lifted markets around the world Tuesday, but by Wednesday morning – as is so often the case these days – fears for the health of the global economy had erased investors’ optimism.