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Stocks Slide After Trump Tweets on Trade, While Bond Market Sounds Recession Warning Trump Warns China That He’s ‘Tariff Man,’ Spooking Stock Investors
(35 minutes later)
Stocks fell on Tuesday, after President Trump sowed confusion over the status of a truce in the trade war between the United States and China, while the bond market, often considered a safe haven for investors, sent a stark warning about expectations for an economic slowdown. The trade war is back on — at least as far as investors are concerned.
The S&P 500 dropped more than 3 percent, with economically sensitive financial and transportation stocks sliding. Stocks sank on Tuesday, as President Trump threatened China with further tariffs, just days after the two countries agreed to a cease-fire in their escalating economic conflict. Referring to himself as a “Tariff Man,” Mr. Trump, in a series of tweets, deepened the murkiness surrounding the trade agreement, while members of his economic team talked down the prospects of a broad deal.
The warning from the bond market came through what’s known as the yield curve, the difference between interest rates on short-term United States government bonds, such as two-year notes, and longer term bonds, such as the 10-year Treasury. The fear is that a lasting trade war will undermine the global growth at a time when some of the world’s largest economies are already slowing down, and the United States, a standout performer, is also expected to slow.
As wary investors seek security, they buy long-term Treasury bonds, pushing prices up and pushing down yields, which move inversely to prices. The yield on the two-year note tends to move along with the short-term rates controlled by the Federal Reserve; both have risen this year. The global and domestic worries are undercutting the prospects for manufacturers, technology companies, regional banks and airlines, intensifying the sell-off in stocks. The S&P 500 lost more than 3 percent on Tuesday, after rallying the day before on the hope of a deal with China.
The gap between the two-year and 10-year yields has decreased to less than 0.12 percentage points — the lowest it has been since before the financial crisis. Many analysts say it could soon fall below zero, a phenomenon known as an “inversion.” “They actually want to see a positive resolution where this problem is solved so they don’t have to worry about it,” said Randy Watts, chief investment strategist at the brokerage firm William O’Neil & Company.
This might sound like so much jargon important only to bond market geeks. But it matters. Since the Trump administration started to impose tariffs on imports from China, the United States economy has been largely insulated from the trade war. The economy is on pace for its best year since 2005, unemployment is near 50-year lows, and corporate profits are surging.
“The inversion has always preceded the recession so you can’t just pooh-pooh it and say this is some crazy forecaster who is telling us the world is going to end,” said Vinay Pande, head of trading strategies at UBS Global Wealth Management's Chief Investment Office. But investors are now grappling with the potential for a protracted conflict, as the president signaled the negotiations could be more contentious than expected. Deep divisions remain between the two countries, including the administration’s insistence that China end its practice of pressuring American companies to hand over valuable technology and trade secrets.
In the past 60 years, every recession has been preceded by an inverted yield curve, according to research from the San Francisco Fed. Curve inversions have “correctly signaled all nine recessions since 1955 and had only one false positive, in the mid-1960s, when an inversion was followed by an economic slowdown but not an official recession,” the bank’s researchers wrote in March. Mr. Trump and President Xi Jinping of China agreed on Saturday not to impose any additional tariffs for 90 days while the two sides work toward a formal agreement. Raising optimism about the deal, Mr. Trump repeatedly cited specific agreements from China, including more purchases of American farm products.
That doesn’t mean the next recession is imminent — it can take a year or two for an inverted yield curve’s recession warning to come to fruition. Nor does it mean that the stock market rally will immediately come to an end. The yield curve also narrowed earlier this year also, and the stock market mostly ignored it then. The deal faced almost immediate doubt. Beijing never confirmed those details, while the White House sent mixed messages about what agreements the leaders had made.
But this time, with investors already worried about the global economy and the effect of the trade war on growth, the warning is being seen in a different light. The United States’ economy is growing at a healthy clip, but China’s is growing at its slowest rate in a decade. The world’s third largest economy, Japan, shrank during the third quarter, as did Germany’s. Then on Monday, the White House said that Robert Lighthizer, the United States trade representative and a longtime China skeptic, would lead the talks with Beijing. The choice of Mr. Lighthizer, who has a reputation as a tough negotiator, signaled a tough road ahead.
The Trump administration and Beijing said on Saturday that they had essentially reached an agreement to pause the trade war for 90 days while the two sides try and reach a formal trade deal. The S&P 500-stock index had climbed more than 1 percent on Monday following news of that deal. But Mr. Trump's tweet on Tuesday seemed to undercut the promise of that agreement. By Tuesday, the optimism had completely faded as Mr. Trump once again called out China for its trade practices. In a series of tweets on Tuesday morning, he pushed the Chinese to buy American agricultural products “immediately,” and questioned whether a “real deal” with Beijing is actually possible.
The financial sector was one of the hardest hit segments of the market Tuesday.. A flattening yield curve hamstrings profitability for banks, which benefit from a wide difference between short-term rates, which they pay to borrow, and long-term rates, which they charge their customers. “When people or countries come in to raid the great wealth of our Nation, I want them to pay for the privilege of doing so,” he wrote.
Stocks of so-called cyclical companies — which are heavily reliant on economic growth for sales and profits — also slumped on Tuesday. Shares of airlines such as American Airlines, Southwest and Delta Air Lines, slipped. The S&P 1500 index of automakers and auto parts — another highly cyclical sector — fell more than 2 percent. On Tuesday evening, after the stock market’s slide, he repeated this theme in another tweet. “We are either going to have a REAL DEAL with China, or no deal at all,” he wrote.
There are several reasons the flattening of the yield curve is seen as such a good predictor of recession. The mood of the market worsened throughout the day, with companies most exposed to the costs of the trade fight bearing the brunt of the pain. Shares of Boeing and Caterpillar — large exporters with significant sales in China — fell sharply, 4.9 percent for Boeing and 6.9 percent for Caterpillar.
Typically when an economy is in good health, yields on longer-term Treasuries are higher than those on shorter term government bonds, reflecting investor expectations that economic growth, and some inflation, will continue in coming years. When investors become less sure of that the economy and prices will continue to rise, yields on longer term bonds rise slowly, or even fall. Chip companies, which depend on extensive networks of factories and subcontractors in Asia, also slumped. The Philadelphia Semiconductor Index dropped nearly 5 percent. Advanced Micro Devices shares plummeted nearly 11 percent, making it the worst-performing stock in the S&P 500 index.
That’s been the case lately. Despite solid domestic economic growth and unemployment near 50-year lows, the yield on the 10-year Treasury note tumbled to 2.94 percent on Tuesday, down from 3.25 percent in September. But trade wasn’t the only issue on Tuesday. The Russell 2000 index of small companies — which typically depend far less on foreign sales — fell 4.4 percent, while regional banks, automakers, airlines and home-building shares all dropped.
And other markets have also been sending some signals about softness in the global economy. American benchmark crude oil prices have plummeted more than 25 percent since the end of September. The bond market also flashed warning signs. The gap between the interest rates on short- and long-term United States government bonds fell sharply on Tuesday, and by some measures hit its lowest point since before the financial crisis. Many analysts say long-term rates could soon fall below short-term rates, a phenomenon known as an inversion of the yield curve.
“The inversion has always preceded the recession so you can’t just pooh-pooh it,” said Vinay Pande, head of trading strategies at UBS Global Wealth Management’s Chief Investment Office.
In the past 60 years, every recession has been preceded by an inverted yield curve, according to research from the Federal Reserve Bank of San Francisco. The phenomenon has “correctly signaled all nine recessions since 1955 and had only one false positive, in the mid-1960s, when an inversion was followed by an economic slowdown but not an official recession,” the bank’s researchers wrote in March.
Few say a recession is imminent, given the strength of the American economy. But the United States has been an outlier in a shaky global economy. Growth in China has slowed, and the economies of Japan and Germany shrank in the third quarter.
Ultimately, such a slowdown could weigh on the United States, too, and some American companies are already starting to prepare for an uncertain economic future.
Automobile makers, already buffeted by rising steel costs because of the trade war, now face plateauing sales at home. General Motors last week said it would idle five factories in North America and cut roughly 14,000 jobs in a bid to trim costs.
On Tuesday, the low-cost retailer Dollar General said that the next phase of tariffs in the trade war between the United States and China “could have a more significant impact on our business and on our customer’s budgets.” Its shares fell 6.8 percent.
The home builder Toll Brothers, facing sluggish sales in the face of rising mortgage rates, reported that orders for new homes fell for the first time since 2014, helping to set off a decline in home-building stocks.
“Investors are worried about the economy,” Mr. Watts said. “That’s clearly what this is showing.”