Stocks Tumble As Inverted Yield Curve Scares Investors

Stocks tumbled Tuesday as the bond market gave signals that in the past have preceded economic slowdowns. The Dow Jones industrial average lost more than 100 points.

The yield curve, the spread between the yields of short-term and long-term bonds, inverted for the first time in five years. That means short-term interest rates were higher than long-term interest rates. Investors have been watching the yield curve closely because, in the past, inverted yield curves have preceded recessions.

But the bond market could be signaling no more than a harmless slowing in the economy, said Jon Brorson, head of growth equities at Neuberger Berman in Chicago.

"We've never seen a recession without the yield curve inverting, but the corollary is not true: Just because the yield curve inverts does not mean we're going to have a recession," he said.

Volume in equity markets was light, exaggerating the effect. Some of the decline might also be attributed to investors' clearing out their portfolios for the end of the year.

Tuesday's bond news was "an excuse to lock in some profits on a somewhat illiquid day," Brorson said. "I wouldn't be surprised if the market wakes up tomorrow and buys them (stocks) back again."

The Dow Jones industrial average fell 105.50, or 0.97 percent, to 10,777.77. Broader stock indicators also declined. The Standard & Poor's 500 index fell 12.12, or 0.96 percent, to 1,256.54, and the Nasdaq composite index fell 22.53, or 1 percent, to 2,226.89.

The U.S. dollar rose against other major currencies; gold prices were also higher.

Crude oil futures fell. A barrel of light crude was quoted at $58.16, down 27 cents, in trading on the New York Mercantile Exchange.

The yield on the 10-year Treasury fell to 4.341 percent, while the two-year Treasury note closed at 4.347 percent.

Normally, lenders receive higher interest when they commit their money for a longer time. A surge in demand for short-term credit can flatten or invert the yield curve.

The last time the yield curve was inverted was 2000, Charles H. Blood Jr., senior financial markets analyst at Brown Brothers Harriman & Co. At the time, "it served its classic function of a warning," he said.

Investors have been watching for months as bonds' long-term yields and short-term yields grew closer. "Although an inverted yield curve does not always imply an economic recession, it has predicted a profit recession 100 percent of the time," Merrill Lynch's North American Economist David R. Rosenberg said earlier this month.

In company news, specialty retailers were mixed as investors waited for more details about holiday sales. Best Buy Co. Inc. (BBY), the nation's largest consumer electronics retailer, fell 61 cents to $43.69. Bed Bath & Beyond Inc. (BBBY), the largest retailer specializing in home furnishings, rose 18 cents to $36.72.

Wal-Mart Stores Inc.(WMT), the nation's largest retailer, fell 61 cents to $47.73 after saying Saturday it sees U.S. comparable store sales for December, those from stores open at least a year, rising 2 percent to 4 percent, in line with earlier forecasts. Inc. fell 66 cents to $48.56 after it saw its best holiday season ever, with a record number of items shipped, the giant online retailer said.

Online retailer Inc. (OSTK) fell $2.49, or 7.4 percent, to $31.15 after it said earnings would fall below earlier targets. "We've had a nice holiday season, just not as nice a season as we've had in the past or as I'd hoped for," said Patrick Byrne, the company's CEO, in a statement.

Guidant Corp. (GDT), the maker of pacemakers and heart defibrillators, fell $2.29 to $64.69 after it said it received a warning letter from the Food and Drug Administration about its manufacturing, research and sales center in St. Paul, Minn. The company also said Friday its results would fall below expectations. Earlier this month, Boston Scientific Corp. (BSX) announced a $25 billion takeover offer for Guidant, after Johnson & Johnson lowered a previous bid for the company to $21.5 billion amid product recalls. Boston Scientific fell 77 cents to $25.07. J&J fell 81 cents to $60.30.

The Russell 2000 index of smaller companies fell 9.86, or 1.44 percent, to 676.58.

Decliners led advancers by more than 2 to 1 on the New York Stock Exchange, where preliminary consolidated volume was 1.51 billion, up from 943.11 million Friday. U.S. equity markets were closed Monday for Christmas.

Overseas, Japan's Nikkei stock average fell 0.86 percent after hitting a five-year high Monday. Britain's markets were closed for the Christmas holiday. Germany's DAX index was up 0.48 percent and France's CAC-40 was up 0.24 percent.