The Dow Jones Industrial Average saw its biggest one-day point drop ever. Jim Rounds, an economist with the Elliott D. Pollack and Company, will explain what is happening.
TED SIMONS: Coming up next on Arizona Horizon. We'll try to figure out what's happening on Wall Street as the stock market takes another massive hit, also tonight, how best to prepare students for the workplace. And we'll look at how Earth-like planets outside the solar system are discovered. Those stories next on Arizona Horizon.
Arizona Horizon is made possible by contributions from the friends of Eight, members of your Arizona PBS station. Thank you.
TED SIMONS: Good evening and welcome to Arizona Horizon. I'm Ted Simons. Another rough day on Wall Street. The Dow Jones Industrial Average fell more than 500 points for the second time in as many days of trading. Economist jim rounds with elliott d. pollack company joins us to make sense of this volatile market. Jim, good to see you.
JIM ROUNDS: Thanks.
TED SIMONS: Down 1,000 points in the opening minutes of trading, 588 down, what's going on out there?
JIM ROUNDS: There is two things going on. I think the bigger issue is what could we expect and what was unaccepted. We knew that there was going to be a market correction, so maybe around 10%, 5% to 10% for the last several months. Only because the economic fundamentals were not supporting a stock market whether you look at the Dow or whatever it was. It was not that long ago that we were worried about a bubble, maybe forming in the stock market, so we knew a correction was going to happen. It's the scale that was unaccepted. That's been largely driven by what's happened in China.
TED SIMONS: I want to get to China in a second, but you are calling this now a correction, some are saying it could be signs of a bear market and other things. What are you seeing out there?
JIM ROUNDS: So people are more sensitive to outside news than they were before. And we went through a really tough downturn. People are worried about their retirement portfolios, whatever it may be. Some of that lingered, even though we're well into the recovery, it hasn't well felt like it. It manhunt been a typical recovery so there is like a bit of psychology going on still, but it's the unexpected stuff happening in areas that, like the Chinese stock market. How, how China is performing. A big deal because it's such a large economy, but we've been hearing things like about Greece and what's been happening in Europe and whether North Korea is going to have some additional problems as South Korea, so all these little things were brewing, but it hasn't been a big enough deal. We finally got into a country that's big enough where people are freaking out a bit. I think that they just need to cool down and let this pass. I think some of this is emotion. It's not based on the economic fundamentals we talk about.
TED SIMONS: So you don't. Other economists, I would imagine, don't see this as the initial sign or the initial signs of a global recession?
JIM ROUNDS: Well, there is some out there that are knuckle heads calling for the next Apocalypse and calling for Hoarding of water and canned foods and guns. These are the people trying to get attention. What you want to look at is the economic information over a longer period of time. We've been growing, GDP has been growing. We've been adding jobs at the U.S. level, globally there's been a slowdown on a lot of countries, but the underlying economic data is that we would see moderate growth. We would have to see a lot of potential shocks happen to derail that growth, so the U.S. should be somewhat shielded by what we have heard so far. That's the key, is what we have heard so far, the full picture, or is there still some more to come, and that's what we don't know.
TED SIMONS: What do we know so far about what's happening in China? Why the big sell-off over there?
JIM ROUNDS: Well, you cannot sustain growth like what they had. There was some problems in terms of developing a real estate bubble. You recently saw the occurrence is he devaluation, so there are a lot of signs the economy is slowing. There were reports that China was growing by as much as 10% compared to say 2.5 to 3%. It's slowing rapidly. It's a big part of the U.S., or it's a big part of the global economy. It's the second largest economy, and so if they start to have problems, even if we are growing moderately, it will pull us down, but there is a lot of other countries throughout the world that are slowing, as well, so you have to pay attention to then, but in terms of the back home in the U.S., we're still seeing enough growth where I think that at worst, unless something is out there that hasn't been discussed yet, we might see maybe a quarter of a percent knocked off the gdp or a half a percent, so we drop from 3 to 2.5. It's still a big deal, but we're not talking about falling into a recession. It would have to be things escalating in China, combined with seven or eight other things that would create a series of shocks that would derail the economy. What's happening in the stock market.
TED SIMONS: As far as the market is concerned, these massive drops, what's going to stop them?
JIM ROUNDS: Well, it tends to swing more than it should. And so you end up seeing stock market growth greater than what the underlying fundamentals would suggest. You don't necessarily always develop a bubble, but you see growth, and then it maybe drops off. Right now we're in that period where people are emotional. They are a bit uncertain about what you are going to see, so you will see the stock market drop back down a little below what the fundamentals would suggest. And it's probably going to recover, so if we hear the same stories that we've been hearing the last few days, I think that things are going to stabilized, not a lot different than where maybe we saw it today with the Dow around 16,000 to 17,000, but look for people to be saying, I didn't anticipate this happening, or this was unexpected. When you hear that wording, you know things could maybe get a little worse, but it's not time to panic yet.
TED SIMONS: Interesting, so 1,000 points down in the last two days of trading. No time to jump out of the window, at least not now.
JIM ROUNDS: Low window.
JIM ROUNDS: No, no. People need to remain calm. Hopefully, everything will be okay and people will kind of get back to their, you know, normal way of evaluating investments within the next couple of wreaks.
TED SIMONS: I am shocked to hear the Dow Jones Industrial Average in the teens. When I hear 16, 17,000, something had to give.
JIM ROUNDS: You also have to maintain perspective, look at where we were during the recession. And so, even with what's happening in China, yeah, it's coming off the highest that it had and has been dropping since around June. But it's still significantly -- it's still posting significant growth compared to the prior year. So, it's like all the other economic data that we discussed, one data point really doesn't tell the story. You have got to look at the package, not time to freak out. It might be a bit better than the new stories that you are hearing, but you don't have to go by guns and canned goods and water just yet.
TED SIMONS: All right. Good news. Thanks, Jim. Appreciate it.
JIM ROUNDS: Thank you.
Jim Rounds:An economist with the Elliott D. Pollack and Company.
