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What’s Next Following Wednesday’s Economic Crash?

The stock market did its best to recover Thursday after falling off the cliff on Wednesday [1], sending Wall Street into panic as the 10-year and 2-year Treasury yield curves inverted for the first time in more than a decade. 

The Dow Jones, which dropped more than 800 points Wednesday, began its slow recovery. As of 4 p.m. CDT, the Dow gained nearly 100 points and the S&P 500 was up 7 points. 

CNBC, however, revealed [2] the 30-year Treasury yield fell to record lows and the 10-year yield fell below 1.5%—the first time that happened in three years. 

“I don’t believe the markets can rebound significantly with the current economic constraints and the political climate becoming more corrosive (heading into a presidential election) as the domestic and global economic expansions come to a halt,” said Mark Dangelo, President of MPD Organizations. “Factor in a U.S. domestic debt of $24 trillion that now exceeds annual GDP, and federal government deficits exceeding $1 trillion a year, the impacts to housing will be pronounced with less money willing to back homeownership now firmly stagnant around 63%.   

“And, since global financial markets are now fully connected to each other, the impacts of one country are felt globally, thereby fueling a belief that the certainty of expansion has come to an end.”

The 10-year Treasury note hit a low of 1.47% at 2 p.m. EST, while the yield on a 30-year Treasury note fell to 1.94% for the first time ever. The 2-year Treasury yield hit its lowest level since 2017 at 1.47%.

Gagan Sharma, President and CEO of BSI Financial, said trade policies are creating uncertainty in the market, which can be causing volatility and the recent crash of the market. 

President Donald Trump had threatened to impose additional tariffs on China—10% on $300 billion worth of goods—beginning September 1. On Tuesday he announced plans to delay further tariffs on China. 

The news out of China was just as bleak, as the world’s second-largest economy reported its weakest growth in 17 years and industrial output slowed to 4.8%. 

Dangelo expects that markets will rise, but noted that until free-market principles overtake “civil war rhetoric of political parties,” the negative news will feed the idea of a pending recession. 

He also added that financial markets, whether domestic or international, thrive on certainty. He added that the uncertainty now surrounding the market could lead to the housing market feeling the effects, just not immediately. 

“The immediate impacts to housing may be muted as investors and homeowners wait to assess long-term impacts, but when you factor in the unprecedented and caustic rhetoric from politicians setting policy on Twitter against independent institutions that control monetary policy, the impact will likely be a freezing of an already tepid demand,” he said. 

Sharma added that the market’s decline and the drop in interest rates could be linked to the market’s view of an increased risk of recession. 

“Many indicators are showing that, with the inverted yield curve being the most prominent one. The fall in interest rates will likely help the housing market due to improved affordability,” Sharma said. “However, if a recession does occur, that will negatively impact unemployment and income growth for consumers, which would hurt the housing market.”

Dangelo also said that the GSEs are in the hands of political interests, and the role of housing loan securitization is “completely dominated by institutions held in limbo.” He added the housing loan securitization has not happened post-Great Recession, resulting in a heavily in-debt government supporting MBSs. 

“Everything that is now the housing market, beyond where the loans are issued, are materially tied to the U.S. government and the wealth building of equity and bond markets, all of which are experiencing self-inflicted wounds,” Dangelo said.   

The Fed will play a large role in the coming months, as they will once again be considering interest rates. Interest rates were cut for the first time in a decade on July 31, when the Fed slashed rates by a quarter of a point.

Trump, who sent out a series of tweets following the collapse of the stock market Wednesday, aimed one of his messages toward the Fed. 

“Spread is way too much as other countries say THANK YOU to clueless Jay Powell and the Federal Reserve. Germany, and many others, are playing the game! CRAZY INVERTED YIELD CURVE! We should easily be reaping big Rewards & Gains, but the Fed is holding us back. We will Win!” the President tweeted. 

Sharma said if volatility continues and a slowdown of the economy ensues, than the Fed will most likely lower rates again. 

Dangelo said the combination of the Fed now being called into question, along with remarks made by various leaders, points to a “lack of credibility” for the institution that he says once held the most influential minds of each generation. 

“As the Fed becomes a political whipping post, their decisions will be viewed as resisting pressure or caving into the Twitter storms,” he said. 

The question of whether or not a recession is looming is not an easy one to answer, as Sharma said it best: “there is a lot of uncertainty on this. It’s hard to forecast this one.”