JUDY WOODRUFF: The stock market finished its worst day since the financial crisis began, all major stock indexes down 10 percent from previous highs.
Investors are increasingly concerned about the possibility of another recession in the U.S. and an expanding debt crisis in Europe. The Dow Jones industrial average dropped nearly 513 points this afternoon to close above 11,383. It is now down more than 1,200 points just since July 21. The Nasdaq fell more than 136 points to close at 2,556. Twenty stocks fell for every one that rose on the New York Stock Exchange.
And European stocks hit an 11-month low. There's fear there that the severe debt crisis in Greece, Portugal and Ireland could spread to countries like Spain and Italy.
Well, for more on all this, we turn to Hugh Johnson, chairman and CEO of Hugh Johnson Advisors, an investment management firm. And Gillian Tett, she's the U.S. managing editor of the Financial Times.
And we thank you both for being with us on this day that we're all watching the markets.
Gillian Tett, to you first. What's behind this drop?
GILLIAN TETT, Financial Times: Well, there's basically a collision of two very nasty factors. On the one hand, investors are waking up to the fact that, although a lot of people hoped there would be a magic wand to get the U.S. economy growing again after the big debt bubble, history shows that, whenever you have a period of de-leveraging, of cutting debt, growth tends to be pretty sluggish for quite a while.
So, in a sense, you have had reality striking home. But that reality striking home, the idea that growth is going to be sluggish, has collided with a real sense of panic about the outlook for the Eurozone and the realization that, although the Eurozone leaders have been sweeping their problems under the carpet and using Band-Aid solutions, they haven't really nailed the core of the problem yet.
JUDY WOODRUFF: Hugh Johnson, how do you read this? How much of this is Europe, and how much of it is worry about the U.S.?
HUGH JOHNSON, Hugh Johnson Advisors: I think the European problem has been ongoing, and I think part of it is Europe.
There's no question that that is what triggered the beginning of the decline today. But I think what's been going on, when we take a look at the last nine or 11 days, I think it is basically what you said. And that is the economy of the U.S. is very soft.
We saw the gross domestic product, which is our scoreboard for the U.S. economy, numbers for the first and second quarter. And they were very, very weak. So I think that's part of it. The expectation which has been built in is that this soft patch in the U.S. economy would be, to use the words of Chairman Bernanke, "transitory," that it would be followed by a re-acceleration or at least somewhat of a stronger economy in the third quarter.
We have seen the numbers now at the start of the third quarter for the month of July. We will see the employment numbers tomorrow, which are very important. But we have seen some numbers for July, and there's no sign of a recovery or a rebound in the economy. So I think investors now are extraordinarily worried about a recession.
And the real worry, deeper than that, is they are asking themselves the question, can the Federal Reserve or the federal government in Washington do anything to prevent a recession, to help -- to help the economy?
And the answer that a lot of us are coming up with is, given the changes and all that's gone is, is probably no.
JUDY WOODRUFF: Probably no.
Why is that, Gillian Tett?
GILLIAN TETT: Well, the issue right now is that they're out of ammo. I mean, they have already used all the fiscal measures they could in the last two or three years. And they're pretty much back to where they can go, as far as they can go in terms of the monetary policy measures.
Yes, perhaps they could do QE3, but one of the big problems about QE3, one of the big problems about...
JUDY WOODRUFF: And explain to us what QE3 is, for the layperson.
GILLIAN TETT: Sorry.
QE3 is essentially about taking really unusual measures by the Central Bank to try and combat the risk of deflation. And the problem right now for the Central Bank is that there are signs that inflation is starting to pick up.
And so there are a lot of people in the Central Bank right now who are saying, well, if we try and extend a helping hand to the economy by pumping in lots more cash into the economy, that will create new risks further down the road. So they haven't got a lot of ammo in their quiver, if you like. And that's really creating the sense that, you know, the economy's soft. What are they going to fight it with?
JUDY WOODRUFF: Is there any contradiction here, though, Hugh Johnson?
We also keep reading that companies are sitting on a lot of cash. How does that square with this weakness, this softness you're describing?
HUGH JOHNSON: You're absolutely right. There's two different pictures here. There's the -- sort of the big picture, macroeconomic picture, when we think about the global economy. It's obviously soft and it looks like it might even get softer. And that's one side of the story.
But a lot of investors, a lot of strategists are looking more at companies. And we just came off a quarter, the second quarter, when the company earnings were really strong, up about 15 percent, which is a really solid number, their balance sheets, in other words, their financial conditions, in very, very good shape. We have got strong cash positions and they're doing very well, selling things to other parts of the world as our exports expand.
So you have got two different stories here. The one very, very encouraging part of this whole picture is that, yes, I know the stock market declined, but for corporations it declined to levels that some would argue is very, very cheap and therefore very, very attractive. That's the good part or the silver lining behind this dark cloud.
JUDY WOODRUFF: So how do you square that contradiction, Gillian Tett, and quickly bring in the European part of the equation, and why that's a worry here in the U.S.?
GILLIAN TETT: They're totally related, because right now one of the things that's holding the companies back from spending that pile of cash and kick-starting the economy is confidence, the magic C-word.
And you have got a lot of companies out there and investors who remember the turmoil and the shocking events of 2008, when you had the Lehman Brothers problems. And the thing that is really pernicious and dangerous right now is that, as you start to see the Eurozone unravel or at least come under more and more stress, there are many companies saying, well, maybe, just maybe, I'm going to hang on to my cash. I'm not going to invest. I'm going to wait and see what happens next.
And that, of course, fuels the sense of a bigger downturn or at least a pause in the broader economy.
JUDY WOODRUFF: Hugh Johnson, you -- just to try to help us understand this, you mentioned a minute ago the possibility of going into another recession, a double-dip or whatever one wants to call it. What determines that?
HUGH JOHNSON: Well, it's -- the official way of determining it is, I mentioned gross domestic product, which is our scoreboard for the economy. And if you have two quarters in a row where the economy is actually contracting, that is, it's actually declining in total gross domestic product, then it's a -- then you're back into a recession or back into what's officially a double-dip.
But, quite frankly, no matter what you call it, you know, a rose by any other name is still a rose. It feels like right now, given the slowdown we have had for the first half of this year and the slowdown we see in the month of July, it feels to everybody out there that this is a recession right now, especially those that don't have jobs, especially when you look at employment conditions.
Yes, we're adding jobs. Yes, employment conditions are improving, but at a snail-like pace, anemic pace, and certainly anemic compared to any other recovery. So you don't call it a recession yet, but it certainly feels like and in some ways looks like a recession.
JUDY WOODRUFF: Gillian Tett, come back to that question that I was asking Hugh Johnson about a moment ago about this apparent contradiction between companies having a lot of money and yet this sense that they are not spending it, that they are -- for whatever reason, they're holding back.
Is that something that could be affected by some other set of circumstances, or are we just watching, you know, the car go off the cliff here?
GILLIAN TETT: Well, ask yourself the question that, if you were sitting at home with a big bank account and thinking about buying a house, but you could see that actually there was a lot of turmoil coming up in your life, a lot of turmoil at the company that you are working at, would you actually go forth and spend that money?
That's kind of the question that company executives are facing right now, because they have this cash. But suddenly they can see the economy slowing down. And more importantly, the shadow of financial crisis is sort of looming around the corner. And, yes, it's over in Europe. Yes, it's at the other side of the Atlantic.
But if there's one thing we have learned in the last four years, it is that the global economy and financial system these days is incredibly interconnected. And when something goes wrong in one corner, it has a nasty way of infecting the rest of the system in unpredictable ways.
So, feelings, that sense of fear, that sense of uncertainty, really matters. And somehow the American economy has got to get its mojo back. The people have got to start feeling confident again. Unfortunately, though, there isn't a lot that's really driving that confidence right now.
JUDY WOODRUFF: So, Hugh Johnson, if you are an ordinary American and you are sitting there, and you don't have a lot in the stock market, maybe you have a retirement plan or so, what are you to think at this point?
HUGH JOHNSON: Well, the first thing you do is, you ask yourself, can you sleep at night? And if you can't sleep at night, maybe you want to do something about your investments. In other words, if you can't sleep at night, maybe reduce your exposure to the stock market, find a safe haven.
Treasuries are still very, very safe, despite what you might hear from some folks. So that's the first thing. If you cannot -- if you are fine and you can sleep at night -- quite frankly, I have been through a lot of these before. This one, like all the others, will end. I can't tell you at what level. I can't tell you how long, but it will end.
And so for most people, I would say hold on to your investments because, in time, you will be just fine. That might sound like wishful thinking, and I'm sure it does. But, nevertheless, I have been through so many of these. And my guess is that is going to be the same outcome this time around.
JUDY WOODRUFF: Well, we hope that all of us can sleep a little bit tonight.
And certainly, the two of you, we thank you, Hugh Johnson, Gillian Tett. Thank you.
GILLIAN TETT: Thank you.