Investors scramble as the S&P 500 dives into bear market territory

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• Judy Woodruff:

  The financial markets closed out this week with yet another head-spinning day, with one of the main indexes, the S&P 500, plunging for almost three hours into bear market territory, signifying a drop of 20 percent or more from its prior record.

  For its part, the Dow Jones industrial average lost ground for the eighth straight week, the first time that has happened in decades. The tech-heavy Nasdaq is already in a bear market. That index and the S&P 500 saw their longest streak of weekly losses since 2001.

  By the close of trading, the Dow industrials were actually up almost nine points to close at 31261. The Nasdaq fell 34 points at the close, and the S&P 500 gained a half-point after that slide into a bear market earlier.

  Let's look at what's behind this ongoing volatility and downward trend and what it may signal about the economy.

  Jason Furman is an economist at the Harvard Kennedy School, and he served as a top adviser to President Obama.

  Jason Furman, welcome back to the "NewsHour."

  So, how do you read this volatility and what's going on in these markets?

• Jason Furman, Harvard Economics Professor:

  Look, it's a scary time in the markets.

  But we always have to remind ourselves that the market is not the economy. Just look. This past week, several retailers reported terrible earnings. But consumers are actually buying a lot. It's just the terrible earnings were because of the wages and because of the prices the retailers were paying.

  So there's a lot of pieces to the economy. This is not a good one. But there's many others, some of which are better.

• Judy Woodruff:

  So, for people who want to understand, they're listening to you, but they're still asking, why is it so volatile?

  What do you say?

• Jason Furman:

  There's two things going on here.

  There's one key variable that matters a lot for the stock market. And that's interest rates. The Fed is raising interest rates right now. That makes it more attractive for investors to move their money into bonds and out of stocks. When they sell their stocks, the stock market goes down.

  So part of what we're seeing here is a consequence of the Federal Reserve raising interest rates to stop inflation. And part of it is that inflation is maybe starting to chip into profit margins for some of these firms.

• Judy Woodruff:

  And yet we know the Federal Reserve has said, we are going to gradually raise interest rates until we think — as long as we think it's necessary to do that.

  Why doesn't that provide some reassurance in the market?

• Jason Furman:

  It is a tricky job the Fed has right now.

  Normally, they would say, wait, we are nervous about what's going to happen to the economy, and so we want to maybe keep rates a little bit lower to help the economy. But they can't afford to do that, because the inflation rate has been 8 percent over the last year. They need to bring that down. They need to keep going.

  And the market is saying, we're not sure you're going to be able to bring inflation down without causing a recession. And whenever you raise interest rates, that makes stocks just a little bit less exciting, and makes the market go down. But there's not much the Fed can do to get out of that bind, because it still needs to bring down inflation.

• Judy Woodruff:

  So what's looming there is — as you just said, is the possibility of a recession.

  How do you calculate how likely we are to move into a recession?

• Jason Furman:

  It's a really hard thing to predict.

  There's an old joke that bear markets have predicted nine of the last five recessions. And so, yes, sometimes, you get a recession. Sometimes, you don't get a recession.

  If I look at the next six months to a year, I see consumers that continue to spend at very high levels, balance sheets that were healthier than they were before the crisis, businesses that are rebuilding their inventories, and workers that are returning. All of that is reassuring to me for the next six months to a year.

  Past that is where I personally start getting more nervous, but, right now, a lot of uncertainty. No one can tell you for sure.

• Judy Woodruff:

  But what I also hear you saying, Jason Furman, is, there is a distinction between what's going on in the economy and the measurements you just mentioned and what's going on in these everyday, Monday-through-Friday financial markets.

• Jason Furman:

  Absolutely.

  We have a 3.6 percent unemployment rate. We have been creating an average of about 500,000 jobs a month. Consumers have been willing to spend. There are a lot of strong things. And the real economy, the parts of the economy that are most important to most Americans, is whether you have a job. And, right now, most everyone that wants one has one, as evidenced by that low unemployment rate.

• Judy Woodruff:

  So for people who are watching and they're saying, all right, it's Friday evening, do I go into the weekend worrying about this, not getting a lot of sleep, or do I sleep well tonight?

• Jason Furman:

  I'd say sleep well tonight…

  (LAUGHTER)

• Jason Furman:

  … but wake up Monday just a little bit more vigilant than you would be otherwise.

• Judy Woodruff:

  All right, Jason Furman, thank you very much.

• Jason Furman:

  Thank you.

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