JEFFREY BROWN: Today's plunge, like similar whipsaw moves in recent days, clearly makes for anxious moments and requires steely nerves.
NewsHour correspondent Spencer Michels reports on how one of the country's largest institutional investors is handling that volatility.
MAN: Let's get straight to it: the Dow down triple digits, as investors worry about Europe again and the threat of a recession here at home.
SPENCER MICHELS: If you want to get a sense of what it's really like to have to deal with losing billions of dollars in the course of a single day, try spending some time in the company of a major public investor, CalPERS, the California Public Employees' Retirement System, based in Sacramento. It lost $18 billion in one day earlier this month when the stock market dropped precipitously.
That's a lot of money, even when you figure CalPERS' investments total $228 billion, more than any other investor in the U.S. The fund represents 1.6 million state and local government workers and retirees, who depend on a strong, steady return on their collective investment for their pensions.
A trading day like today, where the market spent much of the day dropping by hundreds of points, threatens that.
JOE DEAR, California Public Employees' Retirement System: It's impossible not to get emotional, but there's no need to do something dramatic and sudden.
SPENCER MICHELS: Joe Dear, the chief investment officer at CalPERS, admits he has had a sleepless night or two, but his instincts are to stay calm and look for opportunity, even when the bottom seems to be dropping out.
JOE DEAR: You look at the portfolio and you decide what steps need to be taken. But there's no need to panic. There's no need to get overly emotional.
SPENCER MICHELS: Dear is a 60-year-old former labor researcher who headed OSHA in the Clinton administration and was chief of staff to the governor of Washington state. Then he took over the state investment board, and learned how to play the markets.
For the past two years, he's guided CalPERS' investment strategy, following the big market downturn in 2008. At that point, CalPERS had little cash on hand, and had to sell assets to pay pensions. Today, the fund has adequate liquidity. And when we visited, Dear was hoping 2011 wouldn't be a repeat.
JOE DEAR: OK, is this 2008 over again? Are we going to get a credit market seizure, that is, where the lubricant, which is what credit is, what banks trade and what businesses borrow and what consumers -- are we going to get a stoppage in that? Because that's like the lubricant in the economy. If it's not there, the economy seizes up. And then you get the abyss. You get the financial Armageddon. So that's the first question. And you look around and go, no, this is not one of those.
SPENCER MICHELS: That's what you said?
JOE DEAR: That's what we said. So, OK, so we have got some time to really think about this.
SPENCER MICHELS: What was different this time, Dear said, was that, because banks were in better shape, there would be no credit freeze, like there was three years ago. This was mostly a political, not a financial, crisis.
Dear's boss, CalPERS CEO Anne Stausboll, keeps a close eye on the market as well, but she too is worried about a repeat of 2008.
ANNE STAUSBOLL, California Public Employees' Retirement System: It's always tough when we have these market downturns, and I find myself checking my TV every couple of hours, which is probably not what we need to be doing.
SPENCER MICHELS: The wide market swings that started last week were a sharp departure from where CalPERS and the market had been.
ANNE STAUSBOLL: We had a 20.7 percent return, as you probably know, for the year, and it was our best return in 14 years. And we felt like we had really bounced back. So, kind of looking at this period of a few weeks really makes you reflect on the ups and downs of the market and how misleading it can be to focus on too small of a time in the market.
SPENCER MICHELS: Last year, the CalPERS stock portfolio did better than the S&P or the Dow Jones.
CalPERS traders are into all sorts of investments. The system recently raised its target on stocks to 50 percent of its portfolio, hoping to better guarantee pensions, while lowering its troubled real estate holdings to 8 percent. Bonds are at 19 percent, and the rest is in commodities and hedge funds. Those targets guided Dear's decisions, but the big sell-off last week presented him with some crucial choices.
JOE DEAR: Well, OK, market's really down. Is it going to go plunging into gigantic losses that will persist? Probably not. Let's buy stocks to get back to our target. So, as the market was going down, we were going in to buy to move back to our rebalance, as it's called, rebalance back to our target.
SPENCER MICHELS: So you did buy when the market went down?
JOE DEAR: Yes. Yes, we bought $4 billion of stock on Tuesday and Wednesday.
SPENCER MICHELS: Some analysts have blamed the market volatility on high-frequency trading, where computers are programmed to buy and sell stocks within a second. That's one thing CalPERS doesn't do, though some of the hedge funds it invests in do.
But Dear has to deal with it.
JOE DEAR: The volume of trading done on the New York Stock Exchange has fallen dramatically over the past six years. Well, where is it going? It's going to a lot of electronic trading, some of its exceedingly fast trading. And it's introduced new risks into the system that we didn't have before.
SPENCER MICHELS: So it sounds like, even for you, that stuff is pretty hard to predict and -- and deal with.
JOE DEAR: Well, we're in there as an investor with a value orientation and a long horizon, and we're trading in the same market where people are executing trades within a second, buying and selling.
SPENCER MICHELS: What bothers Dear even more are the looming troubles in Europe, which again rattled global markets today. Dear is worried about what that could mean for CalPERS.
JOE DEAR: I'm way more worried about Europe than I am about the United States. And here we're talking about banks.
People are familiar with Greece and Portugal and Ireland. The bond market in Italy is the third largest in the world. If there's real trouble in Italy and in Spain, there isn't the capacity today in the European banking system, in the European political system to deal with that problem.
So think about it. You have got the smoke coming up. And you're wondering, are you going to see flames, and, if you see flames, is there going to be enough water to put out that fire? Don't know. So there's real reason to be concerned about how things will play out across this intermediate term. It could go badly.
SPENCER MICHELS: Until yesterday, CalPERS had recovered about half of the $18 billion it lost earlier. But today's results on Wall Street could alter that downward. Still, Dear distributed T-shirts and signs reminding his staff of 270 traders and others to keep calm, and, by implication, keep trading.