Dow plunges over 650 points – bond market flashes recession warning

Stocks plunged on Wednesday, giving back Tuesday’s solid gains, after the U.S. bond market flashed a troubling signal about the U.S. economy.

The Dow Jones Industrial Average dropped about 650 points or 2.5%, S&P 500 fell 2.5%, Nasdaq declined 2.9%.

The yield on the benchmark 10-year Treasury note on Wednesday broke below the 2-year rate.

Bank stocks led the declines as it gets tougher for the group to make a profit lending money in such an environment. Bank of America and Citigroup fell 4.3% and 5.1% respectively, while J.P. Morgan also dropped 3.6%. The SPDR S&P Regional Banking ETF is down 2.65%.

[Tweet “The U.S. equity market is on borrowed time after the yield curve inverts,”wrote Bank of America technical strategist Stephen Suttmeier”]

There have been five inversions of the 2-year and 10-year yields since 1978 and all were precursors to a recession, but there is a significant lag, according to data from Credit Suisse. A recession occurred, on average, 22 months after inversion.

Shares of Macy’s tanked nearly 17% after the retailer posted second-quarter earnings way below analysts’ expectations as heavy markdowns used in spring to clear unsold merchandise weighed on profits.

Investors are increasingly worried about a global economic slowdown as weaker-than-expected data in China deepened the gloom in the world’s second-largest economy. Official data published Wednesday showed growth of China’s industrial output slowed to 4.8% in July from a year earlier, the weakest growth in 17 years.

The U.S. decided to delay tariffs on certain Chinese goods while outright removing some items from the tariff list, the United States Trade Representative announced Tuesday. Wall Street cheered the news, with the Dow jumping as much as 529 points before settling to finish the day 372 points higher.