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Stocks plummet on fears of recession

Data: FactSet; Chart: Axios Visuals

The Dow Jones Industrial Average fell 800 points — or 3.05% — on Wednesday, after the bond market flashed a warning sign that's predated every recession for the past 50 years.

Why it matters: Wednesday was the stock market's single worst day of 2019. The "yield curve inversion" — which President Trump called "crazy" — comes when short-term Treasury bonds yield a higher rate than the long-term variety.

By the numbers: The S&P 500 dropped 2.93%, the Nasdaq closed down 3.02%, and U.S. bond yields also extended declines. The 10-year yield fell below the 2-year yield for the first time since 2007 — marking the "yield curve inversion" that spooked investors.

  • As the market slumped, Trump blamed the Federal Reserve for raising interest rates "too much and too fast" in a series of tweets:
    • "Our problem is with the Fed. Raised too much & too fast. Now too slow to cut. Spread is way too much as other countries say THANK YOU to clueless Jay Powell and the Federal Reserve. Germany, and many others, are playing the game! CRAZY INVERTED YIELD CURVE!"

The big picture: The inverted yield curve is just one example of concerning indicators, as Axios Markets' Dion Rabouin notes.

  • Global economic data has worsened in 2019, with Japan and 3 of Europe's 4 largest economies — Germany, Italy and the U.K. — heading toward recession by year-end, and China growing at its slowest pace in 27 years.
  • The bond market has priced in the negative effects of the trade war, triggering recession alarms this year that have been accurate since World War II.
  • Those alarms included the New York Fed's recession probability indicator hitting its warning level.

What they're saying:

  • Invesco's Kristina Hooper to WSJ: “The Fed doesn’t have the cure for an economic slowdown or recession. ... But I do think the Fed has the antidote for the stock-market selloff.”
  • Credit Suisse's Jonathan Golub on Bloomberg TV: “This is not a positive sign for the market. ... The Fed is totally empowered to change this dynamic and the market is saying they have to.”

What's next: Markets "tend to keep moving higher immediately following a yield-curve inversion," WSJ notes.

  • "Since 1978, the S&P 500 has risen 13%, on average, from the first time the spread inverts on a closing basis to the beginning of a recession."

The bottom line: Wednesday's sell-off reconciled what has so far been conflicting sentiments between the bond and stock market.

  • As investor optimism has pushed stocks to record highs, the bond market has consistently sent a much more cautious message — that a recession is coming sooner than we think.