NEW YORK, August 15 -- It was an ugly day for Wall Street as stocks plummeted on Wednesday (Aug 14) after the US bond market sounded a loud warning that the US economy might be headed towards a recession.
The Dow Jones dived 800.49 points or 3.05 per cent to 2,5479.42, its worst percentage drop of the year and fourth-largest point drop of all time. The wider S&P 500 benchmark fell 85.72 points or 2.93 per cent to 2,840.6, while the tech-heavy Nasdaq Composite sank 3.02 per cent to 7,773.94. Investors were spooked by a scenario known as the “inverted yield curve,” which occurs when the yields or returns on short-term bonds are higher than those for long-term bonds. What it means is that people are so worried about the near-term state of the economy that they are piling into safer long-term investments, pushing up their prices, which sends yields lower. Briefly on Wednesday, the yield on the benchmark 10-year Treasury bond broke below the 2-year rate, a rare event that has been a reliable indicator in the past of economic recessions. Other parts of the yield curve have been inverted for a few months. For instance, three-month Treasury bonds have been yielding more than 10-year Treasury bonds since late May. But the gap there became more dramatic on Wednesday, with three-month Treasury bond paying nearly 0.4 percentage points more than 10-year Treasury bond, greater than the 0.1 percentage point difference seen in late May. Investors also rushed into the benchmark 30-year Treasury bond, pushing its yield to a new record low.
The actions in the US bond market signal that investors are more concerned about the escalating fallout of the trade war between the US and China and worried by signs that economic growth may be slowing around the globe as a result. Before the US market opened on Wednesday, came the latest stream of poor economic data from overseas, notably the weakest Chinese factory output data in 17 years and German data showing the economy contracted in the second quarter. China and Germany both have large trade surpluses with the United States, but they are also important customers for American products. Germany bought goods and services worth US$72 billion from the United States last year. China and Germany have been hit directly by Trump’s tariffs, and more broadly by the disruption to the global economy that the trade conflict has caused. In other recent dismal economic news, the British economy shrank in the second quarter, and growth flat lined in Italy. Singapore and Hong Kong, which are smaller but still serve as vital hubs for finance and trade, are also suffering.