The U.S. Equity Market Is On Borrowed Time After This Morning’s Yield Curve Inversion

Stocks plunged on the open today with the Dow sinking 457 points, while the S&P 500 dropped 1.5%, and the Nasdaq fell 1.7%, as global yield curves inverted.

“The bond market is saying central banks are behind the curve,” said ADM Investor Services’ global strategist, Marc Ostwald. “It’s all doom and gloom on the global economy.”

The yield curve between the 2- and 10-year notes finally inverted early Wednesday for the first time since 2007 causing investors to run to long-term safe haven assets and pushing the yield on the benchmark 30-year Treasury bond to a new record low of 2.015%. Meanwhile, yields across Europe fell as well, with the German 10-year bund touching a new low of -0.65%. While an inverted yield curve has been a reliable recession indicator, the sky isn’t falling on stocks just yet. Historically, stocks have around 18 months to rally before equity markets begin to see signs of trouble after a yield curve inversion. Still, Bank of America technical strategist Stephen Suttmeier put it best in a note, “The U.S. equity market is on borrowed time after the yield curve inverts.”

As yields were inverting, bank stocks were tanking Wednesday morning. JPMorgan, Bank of America and Citigroup have fallen -3.69%, -4.37% and -5.04%, respectively, at the time of writing. But as investors flee bank stocks, Jim Cramer says there are two key reasons not to overreact to the yield curve inversion’s impact on this group. Cramer said on CNBC that strong mortgage and refinance applications and Buffett’s confidence in the banking sector are signs that this inversion may not be as significant as historical examples. “Longer term, am I going to bet against Buffett because the [algorithms] tell me to sell the stuff? I can’t. Particularly when the consumer’s taking advantage of the rates, and I look at the S&P top 50 companies, and it’s very hard to find ones that are really hurt by this,” Cramer said.

Macy’s stock has plunged nearly -16% after a worse-than-expected second quarter earnings underscored investors fears that the department store industry is in for more pain ahead. The mall-staple retailer, the first of its department store peers to report earnings this season, slashed its profit outlook for the year and warned that that cut doesn’t take into account the next round of tariffs on Chinese goods, which have been delayed until December 15, even as the company’s CEO said consumers will have “no appetite” for rising prices when those tariffs go into effect. Shares of Dillard’s, JCPenney, Kohl’s, and Nordstrom fell right alongside Macy’s, with Dillard’s down -4.76%, JCPenney down -6.91%, Kohl’s down -10.6%, and Nordstrom down -10.99%, at the time of this writing. JCPenney is the next in the group to report and is expected to deliver earnings on Thursday, while the rest of the bunch is scheduled for next week.

We reported Monday that CBS and Viacom were about to reach an agreement to merge, ending the 3-year negotiation saga that has seen more starts and stops to reunite the two companies than there are iterations of CBS’ CSI series. Well, the two finally reached an agreement Tuesday, with the combined company’s CEO Bob Bakish saying the new entity has the scale to take on Disney and Netflix. “It really has almost unmatched scale on the content side,” Bakish said. “We clearly have scale in content. There’s no question the companies are clearly stronger together than they are independently.”

Coming up today, Hedge funds are due to disclose second-quarter investments in their 13F filings giving investors a peek into what the big kids on the Street are buying and selling. Canopy Growth Corp and Cisco Systems are both scheduled to report after the bell.

Stocks We’re Watching

Cel-Sci Corp (OTC: CVM): This biotech is up 941% in the last year, and up more than 14% in the last week. Cel-Sci is currently evaluating its experimental immunotherapy Multikine in a phase 3 clinical study for the treatment of head and neck cancer. The company says this is the largest late-stage study happening in the world now for this indication, and says it will wait on a number of events to occur before reporting final data from the study. 

Axsome Therapeutics (NASDAQ: AXSM): Another biotech up big in the last year, Axsome has delivered a return of 973% over the last twelve months, and is up 12% in the last week. This clinical stage biotech engages in developing cutting-edge therapies for central nervous system disorders. Last week, the company reported its Q2 earnings and revealed that it had completed the phase 2 study of its AXS-07 candidate—an oral treatment under development for the treatment of migraines—and had already met with the FDA to discuss findings. Based on the results of that meeting, the biotech’s CEO Harriot Tabuteau said that the phase 3 MOMENTUM trial “will be the only efficacy trial required to support an NDA filing for AXS-07 for the acute treatment of migraine.”