Is The Stock Market Volatility A Correction Or A Full-Blown Crisis?

Transcript

AUDIE CORNISH, HOST:

Today, U.S. stocks started to make back some of Monday's big losses early, but that rally fizzled by the end of trading. The Dow Jones Industrial Average finished down more than 200 points. That's on top of the 588 points it loss yesterday.

ARI SHAPIRO, HOST:

Big swings in the market can feel like a crisis, but economists say what we're experiencing is actually a correction. Gillian Tett is the U.S. managing editor for the Financial Times. I asked her to explain the distinction between a crisis and a correction.

GILLIAN TETT: In this case, I think correction really means an adjustment, if you like, because the reality is stock prices have been very pumped up by superfluous monetary policy in the last couple of years. They've got way ahead of where the economic fundamentals are. And so, in a sense, what's happened the last week or two is that stock prices have really come back into line - back into gravity if you like - with where the real economy is.

SHAPIRO: What would look different if it were in fact a crisis rather than a correction?

TETT: Well, in a crisis, two things tend to happen. Firstly, you have a dramatic level of almost irrational panic where people try and sell everything they've got. And secondly, it tends to spread out and affect the real economy, and companies and consumers lose confidence and stop buying things or investing in things or creating jobs. And thankfully that hasn't happened yet.

SHAPIRO: What we saw over the last couple of days in the stock market did not look like a gradual, orderly course correction. It was kind of all over the map. What's going on there?

TETT: Well, there's certainly been some really wild, dramatic, gyrations in stock prices, and they're up and down. When you look at what's happened to the stock price of things like Apple, it's astonishing. Now, there seems to be about three things going on here. Firstly, the markets are very thin right now because it is August and you have a lot of the seasoned traders away on vacation. You've got less volume than anywhere in the markets. And so there's a long tradition of people overreacting during this vacation season.

Secondly, you've got a lot of very confusing noise coming out about the real economy. I mean, the workings of the Chinese economy are about as mysterious as the workings of subprime mortgage CDOs back in 2007. People just don't know what to make of the news coming from the other side of the world.

And thirdly, though, you've also got a change in the structure of markets because in recent years, we've seeing a big increase in the amount of computer-driven trading, high-frequency trading, algorithm trading, call it what you like. And that appears to be making stock prices a lot more volatile as well.

SHAPIRO: I'm intrigued. You said this may be linked to the fact that it's August and people are on vacation. Do you mean that we are seeing, like, the junior varsity team executing trades and that's why there's been so much volatility?

TETT: (Laughter) Well, I'm sure the junior varsity team feels like they've grown up 20 years in the last three or four days. But the reality is that, you know, many of the most seasoned and senior traders tend to go on vacation this time of year. And yes, we can all remain in contact with our iPhones and our iPads and whatever else while we're on the beaches. But traditionally, you have had a lot of pretty wild market movements in the month of August historically.

SHAPIRO: If we look at the U.S. economy right now, apart from the stock market, unemployment is down, new home construction is up; things look relatively good. Do you expect the sort of frightening events of stocks in the last couple of days to spread to other parts of the economy?

TETT: Well, the U.S. economy right now, if you were grading it at college or high school, is probably a B-plus in the sense that, yes, things are certainly recovering. But it's not dazzling. The one thing that's really clear, however, is that it's a lot better than the stock market crash over the last few days would actually indicate. Whether it spreads to the rest of the economy depends right now on what happens to that elusive issue of competence. Remember, the economy is not just about statistics. They're also about psychology. And if people start to feel so nervous about the future that consumers don't go out and buy that new washing machine or companies don't go out and create jobs then, yes, it certainly will start to spread to the real economy. And we have seen plenty of cases in history where that's happened before. But if investors simply shrug their shoulders and say, well, you know what? The stock markets are crazy. You know, we don't really trust the way they're operating, but, hey, it doesn't affect us, then actually this week's squall will end up seeming like a huge summer thunderstorm rather than a significant change in the season. We just don't know as of yet. But an awful lot depends as well on what happens next with the Federal Reserve and whether they raise rates or not.

SHAPIRO: That's Gillian Tett, U.S. managing editor for the Financial Times. Thanks so much for talking with us.

TETT: Thank you. Transcript provided by NPR, Copyright NPR.