Fear of Recession Continues to Loom, Triggering Stock Selloff

Fear of Recession Continues to Loom, Triggering Stock Selloff


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Lunga Penrose
Contributor on The Bipartisan Press

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US markets have all opened lower today due to fears over the increased possibility of a US recession in the next 12-18 months. The Dow Jones Industrial Average (The Dow) is down by around 2.89% this morning while the NASDAQ and the S&P 500 indices are all down by 2.47% and 2.51% respectively. 

This selloff in the markets is largely attributed to the increased trade tensions between the US and China as well as the inversion of the yield curve in US Treasury bonds.  

In simple terms, bond yields are the profits that investors earn when buying bonds from the U.S. Government. These bonds are offered with different maturities (contract lengths) ranging from 2 years up to 30 years. In normal times the longer the maturity a bond has, the bigger the yield that the investor can expect to earn. This is referred to as the yield curve. However, there are certain times when the yield curve inverts meaning that shorter-term bonds have a higher yield than their longer-term counterparts.

When the yield curve inverts it is almost always a surefire indicator that a recession is coming soon and this is what has the markets so spooked today.

Areas below the red line are when the yield curve has inverted. The shaded vertical bars indicate a recession. The parts where the blue line drops below the red line are always followed by a recession]

Despite the selloff, some market commentators still believe that a recession is still quite far-off and is unlikely to occur in the next 12 months. CNBC’s Jim Cramer, speaking on the business channel’s Squawk Box TV show this morning said that strong mortgage applications and legendary investor Warren Buffett’s faith in the banking sector — which investors are typically wary of when interest rates are low — means that this inversion may not be as significant as previous ones. “Longer term, am I going to bet against Buffett because the [algorithms] tell me to sell the stuff? I can’t. Particularly when the consumer’s taking advantage of the rates, and I look at the S&P top 50 companies, and it’s very hard to find ones that are really hurt by this,” Cramer said. 

A recession is typically described as two consecutive quarters of negative GDP growth and this hasn’t happened in the US since the first 2 quarters of 2009. With interest rates and the unemployment rate at historic lows, it is quite possible that the market’s fears are overblown and that there won’t be a recession to accompany this yield inversion. As of right now, it is clear, however, that investors aren’t taking any chances which is why there’s such a big selloff in stocks today. 
