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Stocks Plunge 3% on Yield Curve Inversion

Jim Giaquinto

Just when we thought the tariff delay would give us a break from all this volatility in August, the market goes on its second deep dive this month thanks to a yield curve inversion.

The Dow had its worst day of the year, plunging 3.05% (or 800 points) to 25,479.42. The NASDAQ dropped 3.02% (or 242 points) to 7773.94, while the S&P slipped 2.93% to 2840.6. The major indices pretty much closed at their lows of the session.

It’s been a week of extremes for stocks so far with a drop of 1% on Monday due to trade jitters followed by a jump of 1% yesterday as the tariffs were pushed back.

The big event on Wednesday was the 10-year briefly falling below the 2-year, which is considered a harbinger of recession down the road. The move wasn't exactly a surprise, but it was still jarring, nonetheless, for a nervous market.

Investors have been fearing the ‘R’ word for a while now given the slowing global growth, and today’s thin August session meant the reaction was more severe than normal.

However, the negative yields around the world have many investors thinking that such an inversion may not be such a great predictor of recession this time around.

In other words, it may actually “be different this time” as money flows into U.S. bonds because it’s the best place to get a return and not because its preparing for doom and gloom. We’ll see…

More immediately, though, what’s going to happen in the coming days? We probably shouldn’t expect the market to recover all of the previous day’s losses like it did yesterday.

But a rebound in the near-term isn’t out of the question, especially since the market tends to overreact when nervous.

Of course, stocks could sell-off even more between now and then. The major indices are still just single percentage points away from their all-time highs, which were reached just a few weeks ago.

So let’s buckle up! The first half of August has been a volatile ride for investors, and it’s probably not going to get much calmer in the second half.

Today's Portfolio Highlights: 

Blockchain Innovators: Sometimes you’ve just got to “hold your nose and buy”. That’s what Dave did during this sharp selloff on Wednesday by adding Booz Allen Hamilton (BAH). This Zacks Rank #2 (Buy) provides management and technology consulting services to the U.S. government in defense, intelligence and civil markets. Given its industry, it shouldn’t be much of a surprise that BAH is using blockchain in its businesses. The editor also got out of the struggling Virtusa (VRTU) today. Read the full write-up for more on today’s moves. 

Home Run Investor:
"Does this (yield curve inversion) mean that a recession is coming? Well its possible, but John Blank schooled us in the editors meeting today. He noted the last three times the yield curve inverted. The most recent time, there was a 7 month lag between the inversion and the realization we were in recession.

"The previous two were 2 years and 3 years.

"Suddenly it doesn’t seem so ominous does it? I mean we cannot be in expansion forever. Recessions happen. I would bet every single penny we all have on that being a fact. So this expansion will end at some point, but it isn’t today.

"Blank even tossed out the idea that we have a solid 2-3 years before recession, maybe even another 5 years. Talk about long term thinking!"
-- Brian Bolan 

Options Trader:
“The quickest way to stop the insanity of this yield curve obsession is for the Fed to cut rates. That will push short-term yields down further, where they belong, and correct the inversion. Because the market is clearly telling the Fed that interest rates are too high right now, that they overtightened last year, and that they need to fix that pronto.

“In the meantime, use your head and put this all into the proper perspective.

“Our economy is doing excellent. Could be stronger, and would be stronger if interest rates were lower. But that’s being addressed. And still, our full year GDP is on pace for 2.6%, which is stronger than the average annual GDP of this entire 10½ year expansion. Unemployment is near record lows. Consumer confidence is near record highs. And corporate earnings continue to impress.

“I don’t see any signs for a recession anytime soon. And plenty of others are sharing those same sentiments. Use these market pullbacks as a buying opportunity.

“Everybody told you the world was coming to an end last December (not us), only to see the market turn around and flourish into one of the best first-half performances in decades. So don’t listen to those telling you the world is coming to an end now. It isn’t. Buy the dips.”
– Kevin Matras

All the Best,
Jim Giaquinto

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