Yes, Stocks Are Tanking -- But Here's What We Should Really Worry About
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The U.S. stock market opened Wednesday morning with a big sell-off. The Dow Jones Industrial Average plummeted about 350 points before partially recovering.
The Dow and other stock indexes like the S&P 500 always get the headlines when a market frenzy kicks in. But right now a more telling number may be the yield on 10-year Treasury bonds, which fell to 1.9% this morning, the first time in 16 months that it's dipped below 2%. (Bond's yields fall when demand for them goes up and their prices rise.)
A few minutes later it climbed back to around 2%. But only a month ago it was 2.6%.
The fact that investors are currently so eager to own Treasuries that they will accept a yield of 2% or less should worry us. After all, it's widely believed that inflation will run at about 2% over the next decade—that's the Federal Reserve's target rate. This means investors are now ready to earn basically nothing in exchange for lending their money to the U.S. government.
They are willing to do so because Treasuries offer as close to a guaranteed pay-out as a long-term investor can get: Assuming you hold one until maturity -- and that armageddon doesn't strike -- you basically know you'll get your money back plus the yield. You've heard of "flight to safety?" This is it.
Take this market behavior as evidence that, even after the market plunge, plenty of pessimism about the prospects for growth is still sloshing around. Yes, the U.S. has been (slowly) recovering from the 2008-2009 financial crisis, but Europe now seems dangerously close to another recession, which would put a drag on the whole global economy.
You can see the same dynamic in the oil markets. Crude oil futures are getting close to $80 a barrel, from above $90 just last week. That may come a relief for drivers, but it means that global investors are collectively anticipating the kind of drop in demand that comes with a weakening world economy.
Bottom line: If you want to understand what the markets are saying about the future, keep an eye on bond yields and oil prices, not only the stock market.
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