Stock Plunge: What Happened And What's Next?
RENEE MONTAGNE, host:
This is MORNING EDITION from NPR News. I'm Renee Montagne.
STEVE INSKEEP, host:
And I'm Steve Inskeep. Good morning.
After a 500 point loss on the Dow and talk of panic selling, a blogger for the Wall Street Journal posed a question mocking the tension over what to expect today. The blogger's question was: Will the Earth be swallowed in a lake of fire, or will it rain unicorns and money?
MONTAGNE: Well, we do not know the answer to that question. But we do have David Wessel of the Wall Street Journal to guide us through this week's selloff.
Good morning, David.
Mr. DAVID WESSEL (Economics Editor, The Wall Street Journal): Good morning.
MONTAGNE: Of course -(Unintelligible) seriously, the Dow fell, Asian stocks fell, the European market started down sharply before recovering a bit of ground. Why and why now?
Mr. WESSEL: Well, that's a good question and I'm not sure we know the answer. For some time now, stocks have been going up, even though the economic arrows have been pointing down. That really persists. Something has to give, either stocks go down or the economy goes up. Well, the market seems to have caught up with the economy now.
I think the two overarching worries are: One, the growing sense of the U.S. economy may be tumbling into a new renewed recession, the much feared double-dip. And two, this remarkable inability of European government leaders to get a handle on this mushrooming sovereign debt crisis there, which has spread from Greece to Portugal to Ireland, and now Spain and Italy.
So, why yesterday? Gosh, I don't think anybody knows for sure. These mood swings are very hard to explain. It's almost as if the markets have been distracted by this drama over the debt ceiling in Washington. And once that was solved, they turned around and notice that the bottom has fallen out of the world economy.
MONTAGNE: Right, but is it possible that the markets are overreacting?
Mr. WESSEL: It is. Markets often overreact. Did something happen yesterday in the world economy that accounts for this rapid, sharp plunge? No. But Europe has been looking really, really messy. I was stunned, yesterday. The president of the European Union blasted his colleagues for what he called undisciplined communication and complexity and incompleteness of their rescue packages. And he's an insider.
There are signs that the global economic slowdown is spreading, not only in Europe and the U.S., but in some of the emerging market countries that have been the growth standouts for the last couple of years. And then I think there is this sense that, somehow, governments aren't able to ride to the rescue this time, and that's a little bit unnerving.
MONTAGNE: Well, the Federal Reserve is meeting this Tuesday. Is there anything that the Fed can do or, in fact, will do about this?
Mr. WESSEL: They're not likely to do anything big next week. They're almost surely talking about their limit of options. Their forecast calls for a pickup and growth in the second half of this year, and that's not looking so good right now. But they really don't have a lot of bullets left. The rate is already at zero; they could promise to keep them there longer. They could try another big bond buying initiative to keep long-term interest rates down - the one that influence mortgages; that will help weaken the dollar a little bit to help exports.
But there's not really much left on their plate. And that's one of the unsettling things.
MONTAGNE: Well, another thing that could make a big impact is the government's job report for July, which would be out this morning - comes out in the midst of all this bad news. How will those numbers be scrutinized, do you think?
Mr. WESSEL: Well, very, very, very closely - more than usual. On balance, employers created very few jobs in May and June. And that led people to see that the economy was slowing. So people are going to look at the reading for July with more care than usual, basically to tell the employers pick up the pace of hiring or not. And if they didn't, that will really spread the fears that a recession has already begun.
MONTAGNE: David, just a last thought. Sometimes markets are seen as a predictor of the economy. But can a market plunge like the one we're in right at this moment actually make things worse for the rest of the economy?
Mr. WESSEL: Yeah, absolutely. Look at it this way, over the last week Standard & Poor's 500 Index and the stock market has lost about 10 percent. That means about $2 trillion in wealth has evaporated. And using traditional rules of thumb, the economist at J.P. Morgan estimate that could shave half a percentage point off the economic growth in the second half. And that's a pretty big hit, considering that the U.S. economy grew at less than one percent rate for the first half of this year.
MONTAGNE: David Wessel is the economics editor of the Wall Street Journal, who we hear from often on MORNING EDITION.
Thanks very much for joining us.
Mr. WESSEL: You're welcome. Next time, good news.
MONTAGNE: Hopefully, thanks.
INSKEEP: We'll see.
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