Stock Market Falls As U.S. Economy Does Better
DAVID GREENE, HOST:
The number of Americans filing for unemployment claims has fallen to the lowest level since the financial crash in 2008. And that seems like good news. And yet, it caused the stock market to drop. Meanwhile, Japan and Europe - the sick men of the global economy - are suddenly doing better. And China, which seemed invincible, is doing worse.
To make sense of all of this, we called - as we often do - David Wessel, economics editor of The Wall Street Journal.
David, welcome back.
DAVID WESSEL: Good morning.
GREENE: So let's start with the stock market. Pretty bad day yesterday, down 1.5 percent. What gives?
WESSEL: Right. Well, it wasn't just a bad day; the stock market is having a couple of bad weeks. The Dow Jones Industrial Average lost 500 points, about 3.5 percent since the beginning of August, although, it's still a lot higher than it was at the beginning of the year. I think the latest rout had a couple of causes. One was some bad news from companies. Wal-Mart says sales in its U.S. in the second quarter were actually lower than they were a year ago. That's not supposed to happen to retailers. And Cisco, which makes a lot of networking gear for computers, said it was laying off 4,000 people simply because its business wasn't doing as good as it's hoped.
But the other factor - it's kind of interesting - is that the U.S. economy is doing just enough better that markets now expect the Federal Reserve to begin to wean the economy some of this unusually strong monetary medicine that it has been administering sometimes this fall.
GREENE: So let me get this straight. When the economy is doing at least a little better that, I mean the stock market goes down in reaction?
WESSEL: Yeah, this is full employment for economics reporters.
WESSEL: Here's the deal, the Fed has been printing lots of money, buying $85 billion a month in bonds because the economy has been lousy. This means interest rates have been very low. When interest rates are very low investors who want to make money look to buy something else. So they look to buy say, stock. So the stock market has been strong. But now the economy is getting a little better, the Fed is talking a lot about beginning to scale back its bond purchases, people and markets look ahead, they never look at tomorrow, they look a little bit farther out. They're expecting interest rates to get more like normal. Already the interest rates on 10-year treasuries, which are the benchmark for everything, are higher than they've been in two years. So some investors seem to be pulling back on buying stocks so they can get ahead of the pack and get out before everybody else does.
GREENE: OK. Well, something...
WESSEL: Get that?
GREENE: I do. Something else that keeps economics reporters gainfully employed, following trends around the world. And there have been some unexpected ones going on right now.
WESSEL: That's right. So for a long time we've been hearing and writing and saying that China and the emerging markets are up and the U.S. and Europe are down and Japan is even worse. But the tables have turned. After six consecutive quarters of recession, which is pretty amazing, Europe is finally growing again, although it still has 12 percent unemployment. And Japan, which replaced its central banker a few years ago, is pursuing a much more aggressive policy - much more like the Bernanke Fed than anything we've seen before. There's an air of optimism in Japan that hasn't been seen in years. The last couple quarters has been reasonably good. So that's the plus.
But the emerging markets - especially China - have been slowing down. Analysts at a big hedge fund called Bridgewater say this is the first time in six years that the U.S., Europe, Japan and other big developed countries are contributing more to global growth than China, India and Brazil, the emerging markets.
So for instance Cisco, which I mentioned earlier, said that while orders from customers in the Americas rose 5 percent in this last quarter, orders from Asia were down 3 percent and in China down six percent. So the world has changed.
GREENE: So in just a few words, is the whole China is going to take over the world scare over?
WESSEL: Well, it was always a bit overdone, but China has a lot of problems but it's hardly flat on its back. I mean, remember this: slow growth in China means it's growing at 7.5 percent a year.
WESSEL: That's a heck of a lot faster than the 2.5 or 3 percent we can reasonably expect here in the U.S.
GREENE: David Wessel, economics editor of The Wall Street Journal. Always good to talk to you.
WESSEL: You're welcome.