Huge Drop on Wall Street

ABC News' Rebecca Jarvis and Wall Street Journal's Gerard Baker analyze the state of the U.S. economy.
4:07 | 12/13/15

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Transcript for Huge Drop on Wall Street
Wall Street this week, this week, the Dow down more than 300 points on Friday. Putting stock markets in the red for 2015. Before the federal reserve's expected hike in interest rates this week. The first in nearly a decade. Here to analyze these moves, what to expect from markets, the editor-in-chief of "The wall Street journal." Gerard baker and our own Rebecca Jarvis. This week, Rebecca, plunging oil prices had a lot to do with the stock market drop. Absolutely, George. Here's the problem with plunging oil prices, first what it says about the global economy, it's demanding less oil, that could mean that the global economy is getting weaker. Second of all, it drags down energy companies. Down 6.5% this week. Energy companies, the energy sector in this country has the weakest job growth, in fact, they have had the most layoffs of any sector in this country. Over the last year. 100,000 jobs loss and these are companies that have a lot of debt, being able to pay that debt back going forward relies on oil prices going up. The what street journal this week highlighted a problem highlighted a lot in the past, junk bonds. They're not so highly rated. The companies are not blue chip companies. They're ones they represent a higher risk for investors. They offer a higher yield when you buy a bond. Because they're a riskier proposition. They have to pay a higher rate of interest. Interest rates so low, at 0%. The federal reserve has been keeping rates at zero. Those junk bonds, those high-yield bonds actually look quite attractive. Over the past few years, they have been piling into those bonds, liking what they see and the yield they get. Especially into companies, as Rebecca said in the energy sector, that are now starting to struggle, because there's a huge imbalance in the supply of energy and demand for energy. And those bonds of those companies that have been producing such a high yield are starting to fall in price significantly. And that represents a real risk to investors. And nearly everyone is expected the fed to raise rates this week. But they're still in a delicate spot. Look, the fed hasn't raised interest rates since 2006. They have held interest rates at zero since just after the financial crisis, an unprecedented period. Some parts of world rates are actually negative. You have a mortgage in Europe, a bank sends you a check each week. Now, the U.S. Economy is growing, it's not growing very fast, but unemployment has come down. The economy is growing at a rate where it thinks it has to push interest rates back up. But it's been these low interest rates, the huge demand that the federal reserve has pushing into the economy which has been helping the economy for so long. So, more drops in the market this week? What happens when we lose the training wheels, that's the question, George, and certainly this week, there will be volatility. Last week we saw the fear index the volatility index spike since the summer. Eyes will be on the federal reserve. We're heading into unchartered territory. We haven't been in this position as you say for the last decade. Now we're going into this new phase, where the training wheels come off the economy and what happens next, there are still huge question marks. No one knows the answer to this question. You know, we have had several years now of job creation, long and slow recovery, heading into this presidential election cycle, do you think the recovery continues or does it loses steam? It has been in place for 6 1/2 years. The average length of an expansion in postsecond world W war, has been over five years. This is long in the tooth this expansion by historic standards. Every reason to think that the odds of a recession in the next couple of years are rising significantly. With China showing weak growth, with huge drops in commodity prices, energy prices, and with an economy that remains, that's not shown significant signs of growth, I think the risk of recession are rising significantly. Thank you both very much for time. In this week's Sunday

This transcript has been automatically generated and may not be 100% accurate.

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