Here's What to Buy as Recession Fears Pull Stocks Lower

The Treasury yield curve is closely watched by investors

The German curve is at its flattest since 2008. Again, the Dow fell more than 800 points-down about 3.1 percent-by close of day.

China's threat to impose counter-measures in retaliation for the latest US tariffs knocked stocks sprawling on Thursday, checking earlier attempt to recover from a rout sparked by fears of a world recession.

That was not the only occasion that an inversion in this part of the U.S. bond curve accurately predicted a recession.

The US yield curve, measuring bond investors' confidence, officially inverted on Thursday for the first time since 2007, prompting fears that a recession is imminent.

As investors switched on a risk-off mode and resorted to long-term, safe-haven assets, such as US treasury bills, gold and low-risk currencies, the price of gold rallied and the 30-year treasury bond yield hit an all-time low of a bit over 2 percent. The Dow has dropped more than 5% and the S&P 500 is down more than 4%.

Yields of the US long-dated and short-dated treasury bills all declined on Wednesday.

Another widely-watched recession indicator, the yield difference between three-month and 10-year Treasuries, inverted in March and has been negative much of the time since, bedeviling investors who anticipated that the curve would steepen as the Fed began to cut interest rates.

All three major US indexes closed down about 3%, with the blue-chip Dow posting its biggest one-day point drop since October, major equity indices in Europe closed down 2% or near that while crude prices slumped nearly 5% at one point.

"There are technical factors forcing the longer end of the curve lower, besides negative global yields". Investors sold stocks that ultimately dragged on every index.


U.S. Treasury Rally Overdone?

Harvey's 1986 dissertation showed that the yield curve inverted before four recessions.

"The 30-year yield in itself is historic given that it is moving to massive lows but the curve inversion is typically the signal, one of the better signals you can get that there is increased risk of recession", Bank of America technical strategist Stephen Suttmeier told CNBC.

As fears grow of a weaker economy in the future, investors drive down yields on longer-dated assets on expectation that rates will drop. The inversion is a classic sign of recession.

"However, the widespread coverage of the current inversion in the media is sure to have an impact on behaviour which can definitely be self-fulfilling, especially when it comes to influence the more commonly followed market indicators such as equities".

"Historically, it's 14 to 22 months out". More than 180 of those stocks have fallen more than 20% from their 52-week highs, putting them in bear market territory. Earlier in the week, the 10-year yield dropped below the 2-year yield. "The ball's in the court of the White House and Trump given the flip flops on trades we've seen".

In terms of a potential recession, Falconio said they did not anticipate a recession at this time, due to the weakening yet still decent USA economic growth. Household balance sheets and the consumer remain strong. It is not a solicitation to make any exchange in commodities, securities or other financial instruments.

It was the first time such an interest rate inversion had occurred since 2007, at the start of the US recession that was the country's worst economic downturn since the Great Depression of the 1930s.

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