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.
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.
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.