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Stocks Plunge Again: Are Economic Warning Signs Pointing to Recession?

08-14-2019
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US stock markets plunged again Wednesday, based on fears that a possible recession could be on the way. The Dow Jones Industrial Average lost a whopping 800 points and the Nasdaq sank roughly 242 points while the S&P 500 sank 85 points. 

Economists and investors are concerned that the government bond market is sending a warning signal that the economy could fall into a recession. 

Normally, in a healthy economy, longer-term interest rates are higher than short term rates. But when short-term interest rates rise above long term rates, it's called an "inverted yield curve", and it's happening now.

In the past, that's been followed by a recession within several months to two years. That could force the Federal Reserve to cut short-term interest rates soon to try to avoid a recession.

Meanwhile, concerns about the economy have been deepening as the trade tensions with China rattle investors. But stocks had just rallied on Tuesday after President Trump said the US would postpone some of the tariffs on China.

The president has long said it's time for the US stand up to China. But could the trade war between the two countries hurt his strong economy and maybe his chances for re-election? 

If it's all about the economy, the Trump administration would say the president is winning, big time. "Our economic policy can be summed up in three words, jobs, jobs, jobs," Trump said at a recent rally.
 
Unemployment has hit the lowest rate in 50 years, and stocks are in the midst one of the longest bull markets in history. 

But many Wall Street analysts are concerned about the warning signs ahead. Economists at Morgan Stanley and Bank of America warn of a possible recession with fear over the president's back and forth with China as a top concern. 

The president and his administration may have calmed the China-trade fears somewhat Tuesday, delaying plans for a 10% tariff on billions of dollars in Chinese goods on things likes cell phones and laptops, until just ahead of the busy Christmas shopping season. 

"We had a good talk yesterday with China, a very productive call," Trump said. "I was not sure whether or not they wanted to wait till a Democrat has a chance to get in, hopefully, that's not going to happen."
 
Speaking of the election, while a majority of Americans approve of the president's handling of the economy, his average approval rating remains below 50% making the economy a potential make or break issue heading into 2020. 

 

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