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US stocks plummet as yield curve inverts, raising recession fears

U.S. stocks fell sharply Aug. 14 as an inversion of the U.S. government bond yield curve stoked fears of a recession.

The S&P 500 index slid 2.93%, erasing gains from the day before, after the U.S. announced delays in tariffs on major Chinese imports. The index is down 6.12% since its closing high July 26.

All of the 11 major sectors in the S&P 500 posted declines, with the energy and financials sectors sliding 4.12% and 3.56%, respectively, to lead the selloff.

The Dow Jones Industrial Average ended the day 3.05% lower, while the Nasdaq Composite tumbled 3.02%.

U.S. 10-year Treasury yields dropped nearly 10 basis points to 1.58% and briefly fell below the 2-year yield, which slipped to 1.57% during the trading day Aug. 14. When the interest rate on a longer-term U.S. debt issue falls below a shorter-term bond, the yield curve is said to be inverted.

An inverted yield curve, which preceded all nine of the U.S. recessions since the mid-1950s, suggests that investors are "seriously worried" about a downturn, though such a scenario is still not on the horizon as the U.S. economy remains in "decent shape," according to ING Economics. "Even if we are right, we have to be wary that an inverted yield curve driven by recession fears can potentially be self-fulfilling," ING chief international economist James Knightley said in a note, warning that a prolonged yield curve inversion could make a recession more likely.

Odds of a recession in 2019 and 2020 are currently around 15% and 40%, respectively, factoring in fiscal, monetary and trade policy risks, according to Jake McRobie, senior U.S. economist at Oxford Economics.

"If the yield curve structure holds in line with today's levels for the next few weeks, our model recession odds would rise by another 6-7 [percentage points] to the highest levels since early 2007," McRobie said in a note.

In response to the market turmoil, President Donald Trump again blamed the Federal Reserve and renewed his call for interest rate cuts.

"CRAZY INVERTED YIELD CURVE! We should easily be reaping big Rewards & Gains, but the Fed is holding us back," Trump wrote on Twitter.