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The stock market fell on Friday after investors mastered a gruesome warning sign: Interest rates on long-term government debt fell below the level of short-term bills. Often this is a sign that the recession is on the horizon.
The Dow Jones industrial index fell more than 460 on Friday, or about 1.8%. The broader S & P 500 index declined by 1.9%.
Usually, long-term debt yield is higher, just like 10-year deposit certificates are willing to pay higher interest rates than quarterly CDs.
Bond's observers are nervous when this typical pattern turns on his head.
"We do not see this happening often, but when this happens, it's almost always bad news," says Campbell Harvey. Professor of Finance at Duke University.
That's why the warning lights start blinking on Friday morning when the 10-year Treasury yield was gone below the quarterly bill. The last time that happened was just before the Great Recession.
Harvey follows these rare, "inverted" yield curves for more than 30 years and treats them as a signal of early warning.
"My indicator has successfully predicted four of the last four recessions," he said, "including a very important appeal before the global financial crisis." Harvey will not predict a recession if the yield curve is not reversed for at least three months. But even a flat curve – in which long-term yields are slightly above short-term yields – may be an indicator that the economy is losing steam. we are avoiding a recession but economic growth will be lower – much lower, "said Harvey.
On Wednesday, the Federal Reserve downgraded its economic growth forecast to slightly over 2% for the year and signaled that it is unlikely raising interest rates in 2019.
Fed Chairman Jerome Powell said growth slows in China and Europe is a "wind-blow" for the US economy, and ongoing trade disputes do not help, "Powell said," there's a lot of uncertainty.
The unemployment rate is low at 3.8%, but in February the Olympics has added only 20,000 jobs, which is far less than the economists' forecasts and the lowest earnings since September 2017.
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