What Does the Drop in the Dow Really Mean? Was Tuesday's 16-point decline in the Dow Jones industrial average a mere hiccup or the start of market correction?
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What Does the Drop in the Dow Really Mean?

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What Does the Drop in the Dow Really Mean?

What Does the Drop in the Dow Really Mean?

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We can tell you that China's stock markets bounced back today after a free fall yesterday. Other markets around the world not so much. Tokyo markets fell again. Other Asian markets fell. European stocks are down today. And here we are waiting to see how American stocks finish this day.

In percentage terms, yesterday's drop in U.S. stock prices was the worst since 2003. Investors are wondering what the drop says about the markets and the economy, so we're going to go now to David Wyss. He is the chief economist at Standard and Poor's. Good morning.

Mr. DAVID WYSS (Chief Economist, Standard and Poor's): Good morning.

INSKEEP: Has anything fundamentally had changed?

Mr. WYSS: No, frankly. There's not anything thing we knew in the market today that we didn't know two days ago. And why the market dropped yesterday? Well, I think international contagion was the main reason.

INSKEEP: Isn't that even more disturbing that things would change so rapidly for no apparent reason?

Mr. WYSS: There was an apparent reason: the nine percent drop in the Chinese market. That scared people. It scared people because they didn't know why it was happening in China, really. They were worried that it meant slower growth both in China and as a result in the U.S. It's not a totally stupid reaction. But the main point is markets worldwide have just gotten a lot more connected than they used to be. This is one sign of it.

INSKEEP: How dependent are we on China and China's economic health these days?

Mr. WYSS: Well, China is the largest growth in the world. We're seeing growth over 10 percent a year, an economy that measured by purchasing powers the second largest in the world. Last year, China accounted for nearly one third of total world growth. So yeah, the world economy is very dependent on what happens in China, even more than what happens in the U.S. right now.

INSKEEP: How worried are investors about what's happening in the U.S. right now?

Mr. WYSS: Well, they are worried. And I think Greenspan's comments from two days ago didn't help where he talked about the possibility of a recession.

INSKEEP: This is the former Fed chairman Alan Greenspan, of course.

Mr. WYSS: And not that it was a great surprise. Almost all of us thought there is a possibility of a recession late this year. But, you know, when he says it, people notice.

INSKEEP: Were there are other factors here? There was talk about a computer glitch in the middle of the day that made it appear that stocks had suddenly plunged another 100 points in the middle of the day.

Mr. WYSS: Yeah, well, apparently the Dow Jones computers got way behind around two o'clock in the afternoon and just weren't keeping up with the market. And then caught up all of a sudden at 3:00 p.m. when they switched to the different computers. So you had a one-time disconnect of about 150 points in the Dow, I think that spooked a lot of people and led to some late selling in the market.

INSKEEP: Mr. Wyss, as an economist, can you just give me an idea of what a day like yesterday is like? It's the middle of the day, things are plunging, the bottom seems to be falling out and no one exactly knows why.

Mr. WYSS: Well, we had a good idea why. I mean, this has been happening all day. It's just that sudden gain - that sudden increase momentum late in the day that really spooked people. Up to then, we were down by 200 points. People said, hey, it's a bad day but we've seen this before. But then you get a drop of 150 points in a few minutes and that's when you start to panic.

INSKEEP: What are you expecting in the next few days?

Mr. WYSS: Well, the history says that things will probably be up a little bit today. Usually when you get these kinds of swings, they don't tell you much about anything except what happened that day. And the rest of the week, the rest of the year goes on as normal. People forget these aren't that unusual. On the average we have one decline this size per year. We have on average eight declines in the course of the year that are at least 2 percentage points in a day. The thing is that's 250 points on the Dow nowadays.

INSKEEP: I guess we just live on a roller coaster.

Mr. WYSS: Well, get used to it. If you invest in the stock market, you've got to expect fluctuation.

INSKEEP: Mr. Wyss, thanks very much.

Mr. WYSS: Thank you.

INSKEEP: David Wyss is chief economist with Standard and Poor's.

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