Wall Street’s headaches are growing. The US-China trade war is getting scary. A recession indicator is flashing red. And oil prices are plunging.
The Dow slumped 350 points, or 1.4%, on Wednesday afternoon. The index was briefly down more than 400 points, sinking below 25,000. The Dow hasn’t closed below that level in four months.
The renewed market turbulence reflects deepening concerns about the fallout from the collapse in trade talks between the Trump administration and China. Investors fear that tariffs — and China’s retaliation — will badly slow the global economy and ding corporate profits.
“Trade talks have stalled. That’s putting fear into people and getting them to move out of stocks,” said Ryan Nauman, market strategist at Informa Financial Intelligence’s Zephyr.
Cash has rushed to the safety of government bond yields, sending 10-year Treasury bond yields plunging to the lowest levels since late 2017.
Crucially, the yield curve — the gap between short-term and long-term bond yields — has once again inverted. In the past, that has been a reliable predictor of eventual recessions.
“The curve getting inverted could become a self-fulfilling prophesy,” said Michael Block, market strategist at Third Seven Advisors. “It’s freaking the hell out of everyone.”
The recent market slide has wiped about 6% off the S&P 500 since it closed at record highs in late April. The Dow has declined five weeks in a row, its longest weekly slump since 2011.
Oil, copper tumble
Energy stocks have also been crushed, driven lower by tumbling oil prices. US oil dropped 2.5% on Wednesday amid concerns about rising inventories and how the trade war will impact demand.
Apache, Baker Hughes and Marathon Oil declined about 3% apiece.
Copper, another economically-sensitive commodity, fell 1.2% to four-month lows.
There’s been renewed concern in recent days about how China will retaliate against US tariffs. One worry is that Beijing will place restrictions on rare-earth exports, elements crucial to the production of smartphones, missile systems and other high-tech devices. About 80% of all rare earth minerals imported into the United States are from China.
Recession fears overdone?
The Dow has lost about 6% in May, leaving it on track for its first losing month of 2019. The Dow hasn’t had a losing May since 2012. The CNN Business Fear & Greed Index is flashing “fear,” compared with “greed” a month ago.
The wave of selling brought back memories of December, when economic and trade fears delivered the worst month on Wall Street since the Great Depression. The extreme turbulence nearly ended the decade-long bull market in US stocks.
“I don’t think this is the start of a bear market,” said Block.
Even though the yield curve has inverted and manufacturing is struggling, other economic indicators look relatively healthy. Most notably, the United States added 263,000 jobs in April, lowering the unemployment rate to a 49-year low of 3.6%.
“While fears are definitely justified regarding tariffs and weakness abroad, the US economy is still on very solid footing,” said Mike Lowengart, vice president of investment strategy at E*Trade.
Investor moves into safe havens like utilities and bonds, Lowengart said, “doesn’t mean we’re anywhere near a recession.”