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Why Boeing and GM Stock Dropped 5% Today, and Polaris Is Down 10%

By Rich Smith - Updated Dec 5, 2018 at 11:11AM

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Do the words "yield curve inversion" ring a bell?

What happened

Coming off yesterday's stock market rally, you might have expected stocks to have gained a bit of momentum, and to have continued moving up a bit today -- but no such luck. Instead of rising, stocks jumped off a cliff, with the S&P 500, the Dow, and the Nasdaq stock indexes all plunging 3% or more. Some individual stocks fared even worse, with industrial bellwethers Boeing (BA -5.07%) and General Motors (GM -1.99%) both closing down about 5% today, and smaller Polaris Industries (PII -2.41%) dropping an even steeper 9.8%.

You can thank an inverted yield curve for that.

Glowing red arrow pointing down

Economic indicators flashed red today. Image source: Getty Images.

So what

Supposedly capable of predicting future recessions, an inverted yield curve is what we call the phenomenon when the interest paid on a 10-year Treasury note is less than the interest paid on a two-year Treasury note. Theoretically, money lent for a longer period should earn a higher interest rate than money lent for a shorter period. When this stops being the case, we say the relationship has become inverted, or upside down -- with all the weirdness that implies.

And that's why things got badly weird today. Although technically, the 10-year/2-year Treasury rates haven't yet fully inverted -- they're still about 10 basis points, or 0.1% apart -- there is an inversion apparent between the rates offered for 10-year and two-year Treasuries. Investors are worrying that this inversion will soon spread to the 10-year/two-year relationship as well, and that a recession could soon follow.

Now what

And this, in turn, is why shares of Boeing, GM, and Polaris took a tumble. Inverted yield curves, the 10/2 kind, have preceded every U.S. recession that happened -- but also a few that haven't -- since 1975.

Recessions aren't good news for air travel, as money becomes tight and tourists stop flying around so much -- meaning airlines don't need to buy as many planes. The middle of a recession also isn't a great time to try to sell a car -- and a motorcycle, snowmobile, or ATV, such as Polaris makes. The more discretionary the purchase, the more likely a recession is going to be bad for business.

This, I suspect, is why Polaris stock got hit twice as hard as GM stock today.

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Stocks Mentioned

The Boeing Company Stock Quote
The Boeing Company
$120.70 (-5.07%) $-6.44
General Motors Company Stock Quote
General Motors Company
$35.40 (-1.99%) $0.72
Polaris Industries Inc. Stock Quote
Polaris Industries Inc.
$98.57 (-2.41%) $-2.43

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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