Why the Dow Hit Rock Bottom 4 Years Ago

The bear market that ended four years ago was a once-in-a-lifetime event. In the Dow Jones Industrial Average's (DJINDICES: ^DJI  ) century-plus history, only the Great Depression produced a steeper decline in market prices, and no other bear market in the Dow's history has ever endured a larger drop in corporate earnings. More than 4 million homes went into foreclosure between 2006 and 2011. Nearly 500 banks failed, and hundreds more were kept afloat by a massive injection of government bailout money.

The Dow's final closing price of 6,547.05 was 54% lower than an all-time high of 14,164.53 set a year and a half earlier. The S&P 500, which had peaked on the same day as the Dow in 2007, reached its bear-market low point on the same day as the Dow as well. Its closing price of 676.53 had last been seen in the fall of 1996.

How did the market fall so far? Could it happen again? Below, you'll find a timeline of the key events leading up to the bear-market low of 2009, which may help you better understand the unique economic situation that caused it and realize how unlikely we are to see a repeat performance anytime soon.

Timeline of a collapse
Feb. 8, 2007: British bank HSBC warns of $10.5 billion in potential losses at its U.S. mortgage arm as a result of the housing slowdown. The Dow closes at 12,637.63, down 0.2%.

Feb. 27, 2007: Freddie Mac ceases its purchases of the riskiest subprime mortgages and mortgage-backed securities. The Dow closes at 12,216.24, down 3.3%.

April 2, 2007: Major subprime lender New Century Financial files for bankruptcy. The Dow closes at 12,382.30, up 0.2%.

July 24, 2007: Leading subprime lender Countrywide Financial, in a financial filing, warns of difficult housing and mortgage conditions for the rest of 2007. The Dow closes at 13,716.95, down 1.6%.

July 31, 2007: Bear Sterns initiates bankruptcy proceedings for two of its mortgage-focused hedge funds. The Dow closes at 13.211.99, down 1.1%.

Aug. 9, 2007: European bank BNP Paribas suspends redemptions on three investment funds, leading to a credit crunch that forces the European Central Bank to inject roughly $135 billion into a number of banks on the continent. The Dow closes at 13,270.68, down 2.8%.

Aug. 10, 2007: The Federal Reserve makes its discount window ready to provide liquidity in the event of "dislocations in money and credit markets." The Dow closes at 13,239.54, down 0.2%.

Aug. 16, 2007: Fitch downgrades Countrywide, which immediately draws its entire available credit line of $11.5 billion. The Dow closes at 12,845.78, down 0.1%.

Aug. 17, 2007: The Federal Reserve warns that "financial market conditions have deteriorated" and "the downside risks to growth have increased appreciably." The Dow closes at 13,079.08, up 1.8%.

Oct. 9, 2007: The Dow reaches its peak of 14,164.53 points, up 0.9%. Investors ignore the warnings of low corporate-earnings growth and instead focus on the latest Fed meeting notes, which indicate another interest rate cut by year-end.

Nov. 1, 2007: Citigroup (NYSE: C  ) plunges 7% on an analyst downgrade, which warns that the bank may need to cut its dividend to raise $30 billion. The Dow closes at 13,567.87, down 2.6%.

Nov. 7, 2007: General Motors reports a $39 billion loss -- nearly $19 billion larger than its entire market cap. The Dow closes at 13,300.02, down 2.6%.

Jan. 11, 2008: Bank of America (NYSE: BAC  ) agrees to purchase Countrywide for $4 billion after previously investing $2 billion in the foundering subprime lender. American Express falls by 10.1% after warning that slow consumer-spending and rising delinquencies would hamper its profitability in 2008. The Dow closes at 12,606.30, down 1.9%.

Jan. 17, 2008: The Philadelphia Fed's manufacturing survey falls to a six-year low, and Merrill Lynch reports a $9.8 billion quarterly loss, the worst in its history. The Dow closes at 12,159.21, down 2.5%.

Feb. 13, 2008: President George W. Bush signs a $170 billion stimulus package into law. The Dow closes at 12,552.24, up 1.4%.

Feb. 29, 2008: American International Group (NYSE: AIG  ) reports a surprise $5.3 billion quarterly loss due to bad credit default swaps. The Dow closes at 12,266.39, down 2.5%.

March 11, 2008: The Federal Reserve announces plans to lend up to $200 billion in an effort to combat tight credit markets. The Dow closes at 12,156.81, up 3.5%.

March 14, 2008: Shares of Bear Stearns collapse 47% -- the largest one-day decline in its history -- on news that the New York Fed will provide JPMorgan with the liquidity necessary to stave off bankruptcy for another month. The median price of homes reported sold in February also fell by 8.2% -- the largest year-over-year decline on record. The Dow closes at 11,951.09, down 1.6%.

April 1, 2008: The banking sector surges on news that several banks will be able to raise significant new capital. Citi rises 11%, Bank of America gains 8%, and JPMorgan rises more than 9%. The ISM manufacturing index also rose slightly from the previous month. The Dow closes at 12,654.36, up 3.2%.

Jun. 6, 2008: Unemployment rises to 5.5%, the largest one-month increase in more than two decades. Oil prices spike $10.75 to close at $138.54 per barrel. The Dow closes at 12,209.81, down 3.1%.

Sept. 7, 2008: Federal regulators, led by the Federal Housing Finance Agency, force Freddie Mac and Fannie Mae into government conservatorship to prevent financial contagion in the event of a possible collapse. The Dow closes the following day at 11,510.74, up 2.6%.

Sept. 15, 2008: Lehman Brothers files for bankruptcy after losing $60 billion in the subprime-mortgage market. Merrill Lynch, which has reported over $17 billion in losses for the past year, sells itself to Bank of America to avoid a similar fate. Oil prices fall below $100 for the first time in five months. The Dow closes at 10,917.51, down 4.4%. This is usually considered the turning point in the financial crisis. At this point, the Dow was 23% below its peak.

Sept. 17, 2008: The Fed lends AIG $85 billion in exchange for an 80% stake in the company in an effort to stave off its bankruptcy. The SEC also implements rules prohibiting naked short sales. New-home construction falls to its lowest level in 17 years. The Dow closes at 10,619.66, down 4.1%.

Sept. 21, 2008: Investment banks Morgan Stanley and Goldman Sachs convert to bank holding companies for access to the Fed's discount window a day after President Bush pressures Congress to approve a $700 billion bailout plan. The Dow closes the following day at 11,015.69, down 3.3%.

Sept. 29, 2008: The House of Representatives rejects Bush's $700 billion bailout. The Dow suffers the worst one-day point loss in its history as more than $1.2 trillion in market value vanishes from American exchanges. The Dow closes at 10,365.45, down 7%.

Oct. 3, 2008: Bush signs the $700 billion Emergency Economic Stabilization Act into law, establishing the Troubled Asset Relief Program, or TARP. The Dow closes at 10,325.38, down 1.5%.

Oct. 7, 2008: Fed Chairman Ben Bernanke warns: "The outlook for economic growth has worsened. ... The slowdown in economic activity has spread outside the housing sector." The Dow closes at 9,447.11, down 5.1%. It is the first close below 10,000 points since 2003.

Oct. 9, 2008: Frozen credit markets and the failure of Citi's effort to buy Wachovia prompt a sell-off on the one-year anniversary of the market's peak. The Dow closes at 8,579.19, down 7.3%.

Oct. 13, 2008: Details of the new TARP and simultaneous news of bailout programs in 16 European nations send the Dow to its largest one-day point gain in its history. The Dow closes at 9,387.61, up 11.1%.

Oct. 15, 2008: Recession calls from the Federal Reserve destroy investor confidence. The Dow closes at 8,577.91, down 7.8%.

Oct. 22, 2008: Widespread corporate losses, which include a $24 billion quarterly loss from Wachovia, point to a 10% year-over-year decline in third-quarter profit. The Dow closes at 8,519.21, down 5.6%.

Nov. 5, 2008: Markets continue to be extraordinarily volatile in the wake of the election of 44th president, Barack Obama. The Dow closes at 9,139.27, down 5%.

Nov. 13, 2008: Unemployment claims reach the highest level since the Sept. 11 attacks, and reports from RealtyTrac indicate that nearly a million homes have been lost to foreclosure since August of 2007. The markets, however, detach themselves from reality. The Dow closes at 8,835.25, up 6.7%.

Nov. 19, 2008: Deflationary indicators and extreme weakness in the housing market batter financial stocks -- Citigroup falls 23%, Bank of America falls 14%, and JPMorgan falls 12%. Reports of auto industry struggles at hearings before the Senate Banking Committee send the Big Three into a tailspin -- GM fell by 10%, and Ford (NYSE: F  ) lost a quarter of its value. The Dow closes at 7,997.28, down 5.1%.

Nov. 25, 2008: News that an additional $800 billion in federal funds is available to increase financial-system liquidity fails to offset news of a 0.5% GDP decline. The Dow closes at 8,479.47, up 0.4%.

Dec. 1, 2008: The National Bureau of Economic Research finally confirms that the U.S. has been in a recession for a year. Bernanke and Treasury Secretary Hank Paulson predict further recessionary times ahead. The Dow closes at 8,149.09, down 7.7%.

Feb. 10, 2009: Stress tests and other conditions for TARP bailout funds weigh heavily on markets despite the Senate's passage of an $838 billion stimulus bill. The Dow closes at 7,888.88, down 4.6%.

Feb. 17, 2009: Obama signs the $787 billion American Recovery and Reinvestment Act into law. Oil prices continue to collapse, reaching $34.93 per barrel. GM and Chrysler report that their current bailout funding is inadequate and that they will need billions more to survive. The Dow closes at 7,552.60, down 3.8%.

March 2, 2009: AIG reports that it has lost $62 billion in the fourth quarter, which is the largest quarterly loss in corporate history. The government agrees to an additional $30 billion bailout, bringing the amount of federal funds funneled into the foundering insurance giant to $162.5 billion. The government also announces that it will control up to 36% of Citi's stock. The Dow closes at 6,763.2, down 4.2%.

March 9, 2009: The Dow bottoms out, closing at 6,547.05, down 1.2%.

March 10, 2009: Citi reassures investors that it will not collapse by reporting a profit for the first two months of the year, and its dollar-menu shares spike 38%. Bernanke calls for stricter regulation of the largest institutions to prevent any further collapses. The Dow closes at 6,926.49, up 5.8%.

March 23, 2009: The Treasury announces a plan to absorb up to $1 trillion in bad assets from beleaguered banks, which combines with the prior week's announcement that the Fed would pump $1 trillion into the economy to spread good cheer in the market. The Dow closes at 7,775.86, up 6.8%.

What has changed and what hasn't
Firm government commitments to support the foundering financial system seemed to put a floor beneath the market in the spring of 2009, but many seasoned investors kept expecting to fall right through. A hedge fund manager advised rich clients to buy shotguns for self-defense, and bailout plans were frequently met with skepticism, as details were often scarce at first. Every drop that came after the bottom seemed to be evidence that the market was only in a bear-market rally that would soon be over.

The economy certainly didn't rebound right away, but markets are often a leading indicator. That was the case for both the market's high in 2007 and its low in 2009. We aren't completely out of the woods yet, but there are more positive signs than negative, and the problems on the horizon -- student loan debt, higher tax rates, persistent European weakness, etc. -- are both better understood and less dangerous individually than the implosion of a multitrillion-dollar mortgage market that served as the backbone of economic growth for years. No economy is ever flawless and foolproof. However, the next crisis never looks quite like the old one -- and, given the scope of the last crisis, we should be glad of that fact.

Is AIG investment-worthy today?
After the financial world was brought to its knees, most investors are wary about owning a stake in AIG today. If you're the type of investor who saw opportunity in the spring of 2009, you might be interested in taking a closer look at this former corporate titan. We'll fill you in on reasons both to buy and to sell AIG, as well as what areas AIG investors need to watch going forward. Just click here now for instant access.


Read/Post Comments (21) | Recommend This Article (55)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 08, 2013, at 4:44 PM, Darwood11 wrote:

    Nice chronology.

    "The bear market that ended four years ago was a once-in-a-lifetime event." Well, I sure hope so. But then again, it might not be.

  • Report this Comment On March 08, 2013, at 5:11 PM, JohnMaxfield37 wrote:

    I'll second that, great chronology!

  • Report this Comment On March 09, 2013, at 9:29 AM, mdk0611 wrote:

    Once in a lifetime event? Not if you listen to Stanley Druckenmiller.

  • Report this Comment On March 09, 2013, at 10:31 AM, jainp2013 wrote:

    Are we heading for another downturn from hereon? the market went down in two years from the last peak. So is the correction expected in 2013 or 14 is the question.

    BTW, nice chronology and good summation.

  • Report this Comment On March 09, 2013, at 12:17 PM, PRWins wrote:

    A "correction" in 2013 or 2014? Scary as hell.

    My husband passed away in Dec. 2009 and never got to see any "recovery." Very sad. I wish he had.

  • Report this Comment On March 09, 2013, at 12:19 PM, PRWins wrote:

    What's even scarier is that the entire debacle was caused by banks/investment firms/mortgage underwriters... those pillars of wisdom.

  • Report this Comment On March 09, 2013, at 12:56 PM, xetn wrote:

    And all the "forecasters" including Ben Bernake, failed to see the coming collapse. However, people of the "Austrian" persuasion did see it coming. Ron Paul in 2002 in a standup in the House of Representatives and Peter Schiff in 2006 among others.

  • Report this Comment On March 09, 2013, at 1:11 PM, pablonv wrote:

    Feb. 8, 2007: British bank HSBC warns of $10.5 billion in potential losses at its U.S. mortgage arm as a result of the housing slowdown. The Dow closes at 12,637.63, down 0.2%.

    You use the above quote as a springboard for your chronology. The biggest question is what caused the "housing slow down" in February 2007? What is different now? We seem to have charged back into "irrational exuberance" with both feet. Time will tell who is the cool and who is the fool.

  • Report this Comment On March 09, 2013, at 1:25 PM, 1pOwedyank wrote:

    We need another round of the CRA (Community Redevelopment Act) because red lining is holding us back and so unfair to those who are not credit worthy,

    People, over-reaching, pie in the sky, government programs initiated the melt down, then greedy financial Wall St wizzards finished the job. In a nutshell, those who are supposed to be responsible and have our, and our countries financial well being at heart, are really dumber than a bag of hair, but somehow always seem to land on their feet at our expense.

    For those who can't see it I offer the one finger salute to DC, and Wall St, and ask that you change your ways because my butt is getting sore.

  • Report this Comment On March 09, 2013, at 1:25 PM, jainp2013 wrote:

    I am not too good with either Austrian or keynesian theories but with common sense can say that if the market is going up it has to come down with a correction not necessarily crash. If someone said it in 2006 and it occured in 2009 i dont call it as prediction. If someone has predicted the fall of 2009 (in 2009) it makes sense to credit them.

    BTW, not sure what will drive the correction in 2013/14?

  • Report this Comment On March 09, 2013, at 1:33 PM, vespacian wrote:

    The crash was started by costs from our unjust war against Iraq. $3 trillion says Joseph Stiglitz in costs to America. Secular leaders, such as Saddam Hussein, never join with jihadist groups such as al-Quaida.W was too stupid to know this. But Cheney, Perle, Wolfowitz and Feith knew it full well. They diverted the American military from Afghanistan to Iraq at the behest of the Sharon government. Sharon wanted to sow chaos in the Middle East and he succeeded. War without taxes caused the crash. Now the Zionists want to overhthrow Assad, another secular leader whom we should support.

    The crisis in the market continues. Investors are easily panicked. Announcements by shorters, such as Ackman and Einhorn can cause a stock to drop 10% in one day. The market is not operating according to the rationality of profits, but according to the cry of "FIRE!" by shorters who profit from the chaos.

    We need to ban commercial banks from dealing in derivatives (as the Canadians did long ago). We need to disallow credit swaps. We need to disallow uncovered sales of call options. We need hedge fund managers to provide weekly reports of their transactions. The Sharon-Bush War and the machinations of crooks on Wall Street have seriously eroded the capitalist system in the United States. We have been torpedoed and need to take action against the uboaters.

    The waters are turbulent and could be made the more calm by direct actions against those who have made them turbulent.

  • Report this Comment On March 09, 2013, at 2:16 PM, wwu12345 wrote:

    Interesting to read through your list of a chain of events before and after that crash. It was quite scary. I bought stocks in the period of January-April of 2009. I regret that I did not buy SBUX, HOG, and some other wonderful names during that time. But I did purchase a few big winners. I am still holding onto my ACAS shares which I bought on that fateful day--March 9, 2009. I bought it because I believed that it was not likely for it to go through Chapter 7, and the worst was for it to go through Chapter 11. But, again, if the Fed did not throw money at the broad market, who knows what will the US and world markets be like.

  • Report this Comment On March 09, 2013, at 3:06 PM, ershler wrote:

    xetn,

    If you just went out and bought a S&P 500 index in 2002 the only way you lose money is selling at the market bottom in early 2009.

  • Report this Comment On March 09, 2013, at 11:36 PM, devoish wrote:

    And all the "forecasters" including Ben Bernake, failed to see the coming collapse. However, people of the "Austrian" persuasion did see it coming. Ron Paul in 2002 in a standup in the House of Representatives and Peter Schiff in 2006 among others. - xetn

    Please stop believing this "Austrian as the only gods who saw the bubble" nonsense. these Austrians and Libertarians are nothing but charlatans

    Here's 2 Keynesians that saw it, I can give you more. And even I saw it, and I'm a f'n car mechanic.

    Here's my third ever CAPS post, and TMF's Seth Jayson is one of the first few replies.

    http://caps.fool.com/Blogs/whos-going-to-buy-my-house/1937

    "But although the housing boom has lasted longer than anyone could have imagined, the economy would still be in big trouble if it came to an end. That is, if the hectic pace of home construction were to cool, and consumers were to stop borrowing against their houses, the economy would slow down sharply. If housing prices actually started falling, we'd be looking at a very nasty scene, in which both construction and consumer spending would plunge, pushing the economy right back into recession.

    That's why it's so ominous to see signs that America's housing market, like the stock market at the end of the last decade, is approaching the final, feverish stages of a speculative bubble". - Paul Krugman , 2005, noted Keynesian economist. Noted for being right.

    ANDY SERWER, CNN CORRESPONDENT (voice-over): Is there a housing bubble? It depends who you ask and where you ask.

    DEAN BAKER, CTR FOR ECONOMIC POLICY RESEARCH: Well, there's absolutely a housing bubble. In the last seven or eight years, we've seen an unprecedented run-up in home prices nationwide. - Dean Baker, 2005,- noted Keynesian economist, Noted for being right.

    Read more at

    http://www.calculatedriskblog.com/2005_06_01_archive.html#BE...

    Best wishes,

    Steven

  • Report this Comment On March 10, 2013, at 4:37 PM, FoolTheRest wrote:

    Vaspacian,

    I see you are passionate about your views of US and Israeli foreign policy during the last decade. Would you expand on how the invasion and occupation of Iraq caused excessive real estate purchasing by people who could not previously afford homes by traditional standards, the rise in the Case-Schiller Housing Index, mortgage brokers' to push sub-prime and alt-A loans, securitization of poor quality paper into investment-grade debt instruments, ratings agencies' lack of diligence at best, collusion at worst, bond insurers lack of capital, banks' over-leveraging, insurance and swap counter-parties' over-extension, investors' euphoric lack of diligence, poor securities, housing and mortgage regulatory oversight, tightening credit markets, falling corporate profitability, and a host of other actors not related to US military operations?

  • Report this Comment On March 11, 2013, at 11:00 AM, mdk0611 wrote:

    $3 trillion says Stiglitz, who had a political agenda and wasn't shy about manipulating data to advance it. That number is an outlier that few others, of any political persuasions, even come close to.

  • Report this Comment On March 11, 2013, at 11:24 PM, Cassandrabelle wrote:

    This time we have the Fed doping the market while the jobs "recovery" continues to falter. In the past recessions, there have been lay-offs followed by re-hiring and v-shaped recoveries. This time those people laid off are not being recalled. Companies are doing more with fewer employees and greater reliance on automation.

    In short, machines are replacing peoples' jobs...while the Fed props the corporate America with QE. Exactly how long do you think this can continue before the bottom falls out?

  • Report this Comment On March 12, 2013, at 11:23 AM, mikecart1 wrote:

    I doubt it is once in a lifetime. When the furloughs occur and the real job numbers get out at the end of 2013, the market will tank again. If it doesn't, then the stock market is truly no indicator at all of how the economy really is doing overall.

  • Report this Comment On March 15, 2013, at 5:12 PM, MCCrockett wrote:

    Shouldn't this timeline start in 2006 when the real estate market started its collapse?

    Personally, I think the timeline should start in the early Nineties when Congress enacted laws that permitted Citi Bank to acquire and merge with Traveler's Insurance. You gotta luv Alan and Larry.

  • Report this Comment On March 15, 2013, at 5:17 PM, palofire wrote:

    Cassandrabelle observation is on the money. Any job that becomes obsolete does not return. Stenographers, phone answering personnel, automobile fabricators and assembly personnel, and blacksmiths, to name a very few.

    A powerhouse economic enterprise can go from "the top" to "the bottom" in a virtual blink of an eye. Take a look at a couple of Coal Giants.

    Consider this: Wal Mart became the true giant of retailing in the relatively short space of a couple of generations, as it broadsided the entire "mom and pop" retail industry. It, though, has been broadsided by Amazon and the internet retail industry. It must either change its broad retail model or will go the same way as the thousands of mom and pop stores that it replaced over the previous years.

    It is not a "good" or "bad" thing. It just is.

    Kind of like labor. Unions are dead. Not because they are "bad;" But because "Labor" is not the issue that it was 10, 20, especially 30 years ago. Robotics will continue to replace blue collar labor. Factories will be built at point of need, not where labor is cheap. For example, GE returning Kitchen Appliance manufacturing to America was not an altruistic decision to employ American blue collar labor, as opposed to cheaper Chinese labor. We're talking robots

    here.

    As an investor, I want Motley Fool to carefully and painstakingly come up with the enterprises that are and will be "investment world" of the 21st century, with which those of us born in the 40's through 60's are baffled.

  • Report this Comment On March 19, 2013, at 1:34 PM, rboudbee01 wrote:

    Thanks! I've had too many arguments with people who think Lehman Bros. bankruptcy was the beginning, and that Obama invented and signed TARP. Of course, they also thought that the 9/11/2001 attacks caused the 2000-2003 decline.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2302660, ~/Articles/ArticleHandler.aspx, 9/23/2014 12:26:39 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement