Light trading volume exacerbates stock dive
NEW YORK » Stocks tumbled yesterday as the bond market gave signals that in the past have preceded economic slowdowns. The Dow Jones industrial average lost more than 100 points.
The yield curve, the spread between the yields of short-term and long-term bonds, inverted for the first time in five years. That means short-term interest rates were higher than long-term interest rates. Investors have been watching the yield curve closely because, in the past, inverted yield curves have preceded recessions.
But the bond market could be signaling no more than a harmless slowing in the economy, said Jon Brorson, head of growth equities at Neuberger Berman in Chicago.
"We've never seen a recession without the yield curve inverting, but the corollary is not true: Just because the yield curve inverts does not mean we're going to have a recession," he said.
Volume in equity markets was light, exaggerating the effect. Some of the decline might also be attributed to investors' clearing out their portfolios for the end of the year.
Yesterday's bond news was "an excuse to lock in some profits on a somewhat illiquid day," Brorson said. "I wouldn't be surprised if the market wakes up tomorrow and buys them (stocks) back again."
The Dow Jones industrial average fell 105.50, or 0.97 percent, to 10,777.77.
Broader stock indicators also declined. The Standard & Poor's 500 index fell 12.12, or 0.96 percent, to 1,256.54, and the Nasdaq composite index fell 22.53, or 1 percent, to 2,226.89.
The U.S. dollar rose against other major currencies; gold prices were also higher.
Crude oil futures fell. A barrel of light crude was quoted at $58.16, down 27 cents, in trading on the New York Mercantile Exchange.
The yield on the 10-year Treasury fell to 4.341 percent, while the two-year Treasury note closed at 4.347 percent.
Normally, lenders receive higher interest when they commit their money for a longer time. A surge in demand for short-term credit can flatten or invert the yield curve.
The last time the yield curve was inverted was 2000, said Charles H. Blood Jr., senior financial markets analyst at Brown Brothers Harriman & Co. At the time, "it served its classic function of a warning," he said.
Investors have been watching for months as bonds' long-term yields and short-term yields grew closer. "Although an inverted yield curve does not always imply an economic recession, it has predicted a profit recession 100 percent of the time," Merrill Lynch's North American Economist David R. Rosenberg said earlier this month.