Please ensure Javascript is enabled for purposes of website accessibility

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

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

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

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

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

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
330%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/21/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.