Wall Street suffered heavy losses on Friday following after the gap between the yield on 3-month and 10-year US Treasury Notes turned negative. Investors are highly concerned for an impending recession in the U.S. economy accompanied by a sharp global economic decline. All three major stock indexes finished in the red for the day as well as for the week.
The Dow Jones Industrial Average (DJI) closed at 25,502.32, declining 1.8% or 460.19 points. The S&P 500 Index (INX) lost 1.9% to close at 2,800.71. Meanwhile, the Nasdaq Composite Index (IXIC) closed at 7,642.67, shedding 2.5% or 196.29 points. A total of 8.66 billion shares were traded on Friday, higher than the last 20-session average of 7.71 billion shares. Decliners outnumbered advancers on the NYSE by 3.69-to-1 ratio. On the Nasdaq, decliners had an edge over advancers by 4.90-to-1 ratio. The CBOE VIX increased 20.9% to close at 16.48, its highest in two months.
How Did the Benchmarks Perform?
All three major stock indexes posted biggest single-day loss since Jan 3. The Dow ended in negative territory with 26 stocks of the 30-stocks blue-chip index finished in the red while four ended in the green. The tech-heavy Nasdaq Composite finished in the red due to weak performance by large-cap tech stocks. The S&P 500 also closed in the red with the Materials Select Sector SPDR (XLB) and Financials Select Sector SPDR (XLF) declining 3% and 2.8%, respectively. Notably, ten out of eleven sectors of the benchmark index closed in the red while one finished in the green.
Yield Curve Invasion
On Mar 22, yield on benchmark 10-year US Treasury Note declined to 2.437%, its lowest since January 2018. Yield on 5-year US Treasury Note and 2-year US Treasury Note declined to 2.42 and 2.32%, respectively. However, yield on short-term 3-month U.S. Treasury Note stood at 2.459%. A yield inversion for the 3-month and 10-year bond yields is recognized by several economists as a clear indication of an upcoming recession. This happens for the first time since 2007.
The yield on government bonds decreased significantly as the investors channeled their money from risky assets like equities to safe-haven government bonds,boosting their prices. The Fed has reduced its GDP projections and decided to adopt an extra cautious approach of not cutting interest rate in 2019. Moreover, tepid economic data from Eurozone severely dented investors’ confidence.
Shares of large banks plunged following stiff reduction on government bond yields. Large banks like Bank of America Corp. BAC and The Goldman Sachs Group Inc. GS dropped 3% and 2.9%, respectively. Bank of America carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Eurozone’s Economy at Stake
On Mar 22, IHS Markit reported that manufacturing PMI of Germany fell to 51.9 in March, its 69-month low. Fearing a recession, the yield on German’s government’s 10-year bonds entered negative territory, closing at -0.001%. This happened for the first time since October 2016. The manufacturing PMI of France also contracted in March to 48.7. The composite manufacturing PMI for the Eurozone fell to 51.3 in March from 51.9 in February.
The National Association of Realtors reported that existing home sales in February increased 11.8% to a seasonally adjusted rate of 5.51 million. The Consensus estimate was 5.13 million. This is the highest percentage increase since December 2015.
For the week as a whole, all three major stock indexes finished in negative territory. The Dow, S&P 500 and Nasdaq declined 1.3%, 0.8% and 0.6%, respectively. Fed’s extra dovish stance and its decision to lower the GDP growth rate dented investors’ confidence. Significant economic slowdown in Eurozone and Brexit related confusion add to fears of investors. Yield curve inversion finally resulted in a rout on Wall Street on Friday.
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