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.