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Dow falls 460 points as US recession indicator flashes red

New York(CNN Business) The Dow fell 460 points Friday after a US recession indicator blinked red and a report on German manufacturing raised concerns about Europe's most important economy.

The index shed 1.8%, while the S&P 500 closed down 1.9%. The Nasdaq plunged 2.5%. It was the worst performance for all three major indexes since January 3.

The yield on 3-month Treasuries rose above the rate on 10-year Treasuries for the first time since 2007 — a shift that scared Wall Street. Investors have piled back into stocks after a sell-off in late 2018.

The flattening yield curve, or the difference between short- and long-term rates, has worried investors for months. A narrowing spread is typically seen as sign that long-term economic confidence is dwindling. For decades, an inversion has been a reliable predictor of a future recession.

Friday's flip added to pressure on the Dow that was building before US markets opened.

The index stumbled at the bell on poor manufacturing data from Germany, which also spelled trouble for the country's bond market. The yield on Germany's benchmark 10-year government bond fell below zero for the first time since October 2016.

That news out of Europe fueled Wall Street's ongoing concerns about slowing global growth.

Investors remain jittery about Brexit and the lasting effects of the trade fight between the United States and China, even as Washington and Beijing move toward a deal.

And they are unsure how to interpret the Federal Reserve's signal that it won't hike interest rates this year. On one hand, maintaining rates could ensure that credit keeps flowing and the 10-year bull market continues. But it also speaks to concern about the country's economic health, which could stifle investment.

For the week, the Dow, S&P 500 and Nasdaq finished modestly lower.

But bank stocks, which are particularly sensitive to interest rates and economic worries, took a beating. The KBW Bank index (BKX) dropped more than 8% in the past week.

White House economic adviser Larry Kudlow told CNBC last year that the spread between 3-month and 10-year Treasury yields was important to watch.

"It's actually not 10s to 2s; it's 10s to 3-month Treasury bills," Kudlow said last May. He was referring to the spread between 2-month and 10-year Treasury yields, which is also closely monitored.

Michael Darda, chief economist and market strategist at MKM Partners, said in a note that investors should wait for weekly and monthly averages to show an inversion before they read it as a "powerful recession signal."

And he noted that on average, recessions occur 12 months after an inversion — not immediately.

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