Stocks Plunge Amid Fears Of An Upcoming Recession

Traders and financial professionals work on the floor of the New York Stock Exchange (NYSE) at the opening bell on August 13, 2019 in New York City.
Drew Angerer / Getty Images

Wall Street was down sharply on Wednesday after weak results from China and Germany prompted fears of a coming recession. According to The New York Times, the S&P was down 1.5 percent, Nasdaq Composite dropped 1.7 percent, and the Dow tumbled 650 points as concerns about the global economy signaled trouble for the U.S.

Investors in the United States have turned to long-term safe investments and have pushed the yield on 30-year Treasury bonds to a record low. This is a signal, called a yield curve inversion, that has been pointed to as one of the most reliable indicators of recession in the country. Every time the 10-year note has dropped below the two-year note, as it did Wednesday, it has come before every single economic downturn in the past six decades.

The market instability was prompted, in part, by indicators from China that its economy is slowing. Industrial production dropped 4.8 percent in July – the lowest it has been in seven years, and the weakest growth the country has seen in 17 years.

Germany also revealed that its economy had contracted during April, May, and June. If they have a second quarter of decline, it would mean that the country is in a recession. The country’s GDP shrank by 0.1 percent. Europe’s largest economy has been particularly impacted by the trade war between the United States and China because it relies heavily on manufacturing and export.

Bank stocks were particularly impacted as major players like Citigroup fell 3.4 percent, and Bank of America dropped 2.8 percent.

“The U.S. equity market is on borrowed time after the yield curve inverts,” said Bank of America representative Stephen Suttmeier, according to CNBC.

While the yield curve inversion is a reliable indicator of a recession, it generally takes some time before the economy falls, according to Tom Essaye, founder of The Sevens Report.

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“Historically speaking the inversion of that benchmark yield curve measure means that we now must expect a recession anywhere from six-to-18 months from today which will drastically, and negatively, shift our medium-to-longer term outlook on the broader markets,” he said.

The Trump administration announced a delay on tariffs on Chinese goods on Tuesday, something that is widely seen as a move to avoid harming economic growth. Critics point out that delaying the tariffs could strengthen China’s negotiating position.

“So then tell me why Xi should not continue to wait out The World’s Greatest Negotiator, who keeps ‘dealing’ with himself?” tweeted Jim Chanos, founder of Kynikos Associates.