foxex: WIPED OUT!

The Market Sum | INVESTOPEDIA

Insight after the bell

By Caleb Silver, Editor in Chief

Tuesday's Headlines

1. Stocks slammed as uncertainty returns

2. Chart of the Day: Inverted yield curve hints at recession

Markets Close

Dow
25,027.07 -3.10%

S&P
2,700.06 -3.24%

Nasdaq
7,158.43 -3.80%

VIX
20.74 +26.16%

INV Anxiety Index
99.45 Neutral

US 10-Yr Yield
2.92 -2.27%

WIPED OUT!

There was something about Monday's rally that felt fragile. On Tuesday, it shattered into pieces as global markets sold off from Shanghai to the South Street seaport. Did the world really change so much overnight? Or did investors realize that the celebrations of a tariff ceasefire between the U.S. and China were premature and the realities of a slowing global economy are very real? Probably the second one.

The DJIA and the S&P 500 both dropped more than 3 percent and the Nasdaq fell almost 4 percent. The losses steepened throughout the day as the selling intensified.

In fact, the world didn't change overnight, which is part of the problem. The tariff ceasefire simply kicked the can 90 days down the road, but many challenges remain on that front. And besides, a slowing global economy is a persistent problem that the tariff war only exacerbates.

The slowing U.S. economy manifested itself in an inverted yield curve - one of the warning signs of a potential recession. In this case, the yield on the 3-year U.S. Treasury note surpassed that of the 5-year U.S. Treasury note. In other words, investors think the economy will be weaker in the next 3 years than in 5 years, and the government is less likely to pay back its debts during that period. Investors are willing to pay a premium buying the longer term Treasury note.

Why it Matters:

The long and the short of it? An inverted yield curve is a sign of weakening economic confidence. It can precede a recession, but it doesn't always. Typically, it's the inversion between the 10 year treasury and the 2 year treasury that is the most terrifying. Every time that has happened since WWII, a recession has followed. Those two haven't inverted yet, but the spread is the narrowest it's been since 2007, at about .20%.

Today, it's an inversion of the 5 year treasury and the 3 year. It doesn't automatically mean a recession is imminent or even a year or two away. It just means that the economic conditions for one are taking shape, and bond investors are responding to it.

What's Next:

The U.S. markets are closed for tomorrow in observance of the passing of President George H.W. Bush. An unexpected day off in the middle of the week could be a good thing as investors catch their breath and reassess their outlooks. On the other hand, the selling and sour sentiments were so pervasive today that it's hard to see either changing by Thursday. This market has been unpredictable, and volatility is sure to reign. This handy chart, shared by LPL Securities, shows why what they call the "Three T's" - tightening, trade, and too much debt - will continue to make this market highly unpredictable and volatile for the rest of the year and beyond. Oh good.

Buckle Up.

In other news...

Trump Shows Willingness for Tariffs Amid Optimism on China Talks

One day after the reported ceasefire in the trade war with China, Trump took to (what else) Twitter to indicate his willingness to continue raising tariffs if a deal is not reached. Both parties seem to remain confident that a deal can be reached, though.

German Carmakers Head to Washington, Hoping to Dodge Tariffs by Offering Jobs

This headline pretty much tells you what you need to know.

According to a new Fed report, Millennials Spend Less Than Previous Generations Because They Literally Have Less Money To Spend

Well, that would explain it.

Netflix Will Keep 'Friends' Through Next Year in a $100 Million Agreement

Hopefully this will help us all sleep a little sounder tonight.

Chart of the Day: Inverted yield curve hints at recession

This week, the 3-year and 5-year Treasury note yields inverted for the first time since 2007. What does this mean? A yield curve is considered inverted when longer-term debt has a lower yield than shorter-term debt. When this happens, it's considered to be a foreboding signal of impending recession. The onset of such a recession can often range from several months to a couple of years after an inversion.

The chart below clearly shows that the 3- and 5-year yield curve inversion has occurred this week. Now, before anyone gets too distressed about this, it should be noted that when most economists and investors warn about inverted yield curves, they're most often talking about the 2- and 10-year notes, not the 3- and 5-year. That said, though the 2- and 10-year note yields have not yet become inverted, the spread between the two is the narrowest since 2007. This means that an impending inversion is a clear possibility.

While this is not meant to raise any premature red flags, perhaps it should be a warning that now may be the time for many investors to become less complacent and more vigilant in pro-actively managing their investment risk.