Wall Street collapsed Wednesday following the inversion of main treasury yield curve. The yield on 10-year government bond fell below the 2-year government bond, triggering investor’s concern of an impending recession. Weak economic data across the world further dented investor’s confidence on risky assets like equities. All three major stock indexes plunged on Wednesday.
The Dow Jones Industrial Average (DJI) plummeted 3.1% or 800.49 points to close at 25,479.42. The S&P 500 tumbled 2.9% to close at 2,840.60. Meanwhile, the Nasdaq Composite Index closed at 7,773.94, plunging 3%. The fear-gauge CBOE Volatility Index (VIX) jumped 26.1% to close at 22.10. A total of 8.68 billion shares were traded on Tuesday, higher than the last 20-session average of 7.47 billion. Decliners outnumbered advancers on the NYSE by a 4.44-to-1 ratio. On Nasdaq, a 5.33-to-1 ratio favored declining issues.
How Did The Benchmarks Perform?
The Dow closed in negative territory with all 30 components of the 30-stock blue-chip index closing in the red. This was the biggest single-day decline of the Dow since Dec 4, 2018. The S&P 500 also closed in negative territory. The Energy Select Sector SPDR (XLE) and Financials Select Sector SPDR (XLF) plummeted 3.9% and 3.7%, respectively. Notably, all 11 sectors of the benchmark index closed in the red. The Nasdaq Composite finished in the red due to poor performance from large-cap tech stocks. Both the S&P 500 and Nasdaq Composite posted biggest single-day fall so far in 2019.
Inversion of U.S. Treasury Yield Curve
On Aug 14, yield on 10-year Note dropped to 1.623%, which fell below the 2-year Note’s yield of 1.634. Moreover, the yield on short-term 3-month Treasury Bill stayed at 1.997%, which is higher than both 2-year and 10-year Notes. Meanwhile, yield on long-term 30-year US Treasury Note plunged its all-time low level to 2.061%.
In fact, several economists consider inversion between the 2-year and 10-year bond yields as a clear indication of an upcoming recession. Moreover, inversion between 3-month and 10-year bond yield is continuing since March 2019. CNBC stated that since 1978, there were five yield inversions between 2-year and 10-year Notes, all of which lead to a recession.
Consequently, shares of major banks like JPMorgan Chase & Co. JPM, Bank of America Corp. BAC and Citigroup Inc. C plunged 4.2%, 4.7% and 5.3%, respectively. All three stock carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.
Globally Weak Economic Data
Chinese industrial output in July fell to 4.8%, its lowest level since 2002. Retail sales of the world’s second-largest economy dropped to 7.6% in July compared with 9.8% in June.Germany, the fourth-largest economy in the world, witnessed a 0.1% contraction in its second-quarter 2019 GDP, the first time since the third quarter of 2018. Industrial output in July also declined 5% year over year.
The GDP off the Eurozone economy as a whole declined to 0.2% in the second quarter compared with 0.4% in the first quarter. Meanwhile, second-quarter 2019 GDP of the U.K. contracted 0.2%, for the first time since late 2012. The manufacturing sector declined 2.3% in the second quarter, marking its biggest quarterly fall since the first quarter of 2009.
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