Stock-market bears say don’t forget about this yield-curve signal as trade fears sink equities

A high-stakes tariff fight between the U.S. and China got the blame for Monday’s financial market turmoil, but long-term stock-market bears argued that a renewed signal from the yield curve might be the most important recent development for investors.

Beijing on Monday retaliated against a U.S. tariff increase on $200 billion of Chinese goods by raising tariffs on $60 billion of U.S. imports and threatening broader action. Both China and the U.S. appeared to take harder lines on trade over the weekend, heightening fears that an escalating trade fight could take a significant toll on the U.S., Chinese and global economies.The Dow Jones Industrial Average DJIA, -2.

Capital Economics has long had a bearish outlook for the U.S. economy, looking for a significant slowdown later this year. Higgins said the firm still expects the Fed’s earlier rounds of policy tightening to continue to take a toll, with the eventual rollover dragging down stocks. The firm looks for the S&P 500 to end 2019 at 2,300, around 18% below its current level.

Weinberg noted a number of reasons for falling long-term yields, including bets on easing by the central bank, which is the probably the case in Australia and Canada. But in the eurozone, no rate cuts or further easing of any kind is likely, he said, with investors instead betting that inflation will continue to undershoot the European Central Bank’s target of near but just below 2% in a lackluster economy.

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