The drop in the 10-year Treasury yield stoked investors' fears that the U.S. economy is heading toward a recession. That's because the yield declined below the two-year Treasury's yield. This so-called inversion of the U.S. yield curve has accurately predicted the past five recessions.
When the yield curve inverted earlier this month for the first time since 2007, it led to a broad market sell-off. The yield on the two-year Treasury was little changed at 1.53%. Earlier, it had climbed to 1.54%.
"You have a symptom in the inversion, but really the cause of that symptom is the tariffs and the trade war causing a global slowdown," said Dan Heckman, national investment consultant at U.S. Bank Wealth Management.
The latest losses mark a shift in investor sentiment from just a day earlier, when tentative optimism about the potential for progress in the trade war drove a broad market rally. The market is on a four-week losing streak as investors try gauge whether trade conflicts and slowing economies around the world will drag the U.S. into a recession.
Last week, the trade conflict escalated again with Washington and Beijing threatening new tariffs on each other's goods, triggering a sharp sell-off in global markets. On Monday the market recouped some of those losses after President Donald Trump said his negotiators had received encouraging calls from China over the weekend. Traders drew encouragement from the development, even though China's foreign ministry denied knowledge of any such calls.
"What's still rattling investors is the reality that the trade war is dragging on and, despite discussions about an upcoming meeting, the market is losing confidence that perhaps that might take place," Heckman said.
Market watchers are becoming increasingly circumspect about what lies ahead. UBS, the largest wealth manager in the world, recommended that customers reduce their exposure to stocks, the first time the bank has done so since the depths of Europe's debt crisis in 2012.
Health care stocks and several big retailers also fell Tuesday. Humana slid 5.4%, while Gap slid 4.6% and Nordstrom dropped 32%. Video-game maker Activision Blizzard led communications services stocks slightly higher. The stock climbed 4.2%.
Safe-play sectors like utilities and real estate were among the gainers. Exelon added 1.9% and Welltower rose 1%. Investors also shifted money into traditional safe havens like gold, which climbed $14.60, or 0.9%, to $1,551.80 per ounce. Gold producer Barrick Gold rose 2.9%.
KEEPING SCORE: The S&P 500 was down 0.2% as of 3:50 p.m. Eastern Time. The Dow Jones Industrial Average dropped 92 points, or 0.4%, to 25,804. The Nasdaq fell 0.3%. Smaller company stocks bore the brunt of the selling, sending the Russell 2000 index 1.2% lower.
Major indexes in Europe were broadly higher. U.S. indexes are on track for losses of 3% or more in August in what has been a volatile month for the market. ANALYST'S TAKE: While the inversion in the yield curve between the 10-year and two-year Treasury notes has been a good indicator of a coming recession in the past, it usually means a recession is at least a year off, said J.J. Kinahan, chief market strategist for TD Ameritrade.
"Just because it happened doesn't mean the world ends," he said. "We do still have the China tariff situation, which many believe, if settled quickly, could also lead to a quick economic expansion." TRADE WAR: On Friday, China announced new tariffs on $75 billion in U.S. goods. Trump responded angrily on Twitter, at one point saying he "hereby ordered" U.S. companies with operations in China to consider moving them to other countries, including the U.S.
Trump later announced the U.S. would increase existing tariffs on $250 billion in Chinese goods to 30% from 25%, and that new tariffs on another $300 billion of imports would be 15% instead of 10%. Analysts say uncertainties are bound to remain for global markets as long as Trump continues to send conflicting messages.
"The bigger picture is that deep-seated issues are unlikely to be resolved on the flick of a switch or tweet," said a report from the Asia & Oceania Treasury Department of Mizuho Bank. BIGGER TOBACCO: Shares in Philip Morris International slid 7.2% after the maker of Marlboro cigarettes confirmed that it is in merger talks with Altria Group more than a decade after the tobacco companies split. Altria has focused on cigarette sales in the U.S. while Philip Morris has handled international sales. Philip Morris said that there is no guarantee of success in what would be an all-stock deal. Altria shares dropped 3.8%.
NOT SO SNACKWORTHY: J.M. Smucker sank 7.5% after turning in weak results. NOT SO PAINFUL: Johnson & Johnson rose 1.9% after a ruling against the company in an Oklahoma opiod case wound up being less than investors were expecting.
WHO'S THE BOSS? Troubled pizza company Papa John's climbed 8.7% after naming a new CEO.