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 (NYSE:BA) and General Motors (NYSE:GM) both closing down about 5% today, and smaller Polaris Industries (NYSE:PII) 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.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Polaris Industries. The Motley Fool has a disclosure policy.