Stocks fall as bond market signals recession

Stocks sank sharply Wednesday morning after the U.S. bond market signaled an impending recession.

The Dow Jones Industrial Average, S&P 500 and the Nasdaq composite all dropped more than 1 percent as trading opened Wednesday, with shares of banks leading the losses.

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The sell-off came shortly after the yield on 10-year U.S. Treasury bonds fell below the yield on two-year bonds for the first time since 2007. When 10-year bonds trade cheaper than 2-year bonds, a recession tends to follow within 12 to 18 months. 

The Dow dropped more than 700 points, a 2.7-percent decline, shortly after 1 p.m. The S&P had fallen 2.7 percent, while the Nasdaq had lost 3 percent in that time.

The yield curve inversion follows President TrumpDonald John TrumpO'Rourke: Trump driving global, U.S. economy into recession Manchin: Trump has 'golden opportunity' on gun reforms Objections to Trump's new immigration rule wildly exaggerated MORE's decision Tuesday to delay further tariffs until after the bulk of the holiday shopping season, reflecting mounting fears that the trade war could derail the robust U.S. economy.

Economists at Bank of America, Goldman Sachs and Moody’s Analytics warned ahead of Tuesday’s announcement that the odds of a recession between now and the 2020 election were rising, due in part to Trump’s trade policy.

Fears about the economy could add a new level of uncertainty to the presidential race, which is already in full flight. 

Trump frequently boasts about the strength of the economy under his stewardship, and it has been seen as one of his greatest strengths.

Doubts about the economy could damage the president's brand and give new attack lines to his opponents.

Updated at 1:10 p.m.