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The Dow Bounced Back 5 Years Ago -- Led by Bank Stocks

By Anders Bylund - Mar 10, 2014 at 2:00PM

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Five years ago, the Dow Jones Industrial Average bounced nearly 6% higher on a sign of strength from a major bank. The blue-chip index hasn't looked back since.

Time flies when you're having fun.

Five years ago today, the Dow Jones Industrial Average ( ^DJI 0.57% ) saw a serious turning point in the then-ongoing subprime-and-Lehman Brothers meltdown. Citigroup ( C -0.95% ), which was a Dow member at the time, said it had actually seen a profit through February of that year, instantly restoring some faith in the crippled banking system. The Dow closed 5.8% higher that day, and never looked back at 6,500 again.

Citigroup shares jumped 17% on the same news. Bank of America ( BAC -0.82% ), which also was a Dow member five years ago, soared 10% higher. JPMorgan Chase ( JPM -0.52% ), which still holds its Dow seat, raced 12% higher. It was a good day to own financial stocks, for the first time in several months.

Almost exactly six months after Lehman's 2008 bankruptcy filing, the Dow had lost 41% of its value. And that's where the long climb back to healthier returns started in earnest.

JPM Chart

JPM data by YCharts.

This is also a useful reminder of Baron Rothschild's recommendation to buy when there's "blood in the streets."

If you smelled the market bottom and invested five years ago, you'd be enjoying a 150% return on a straight-up Dow tracker today. For even bigger opportunists, each of the bank stocks mentioned above have at least tripled in value.

True, our own Morgan Housel worried then that Bank of America still could implode like another Lehman, and that the single-digit share prices for most of our major banks just made sense. It takes guts to invest in banks against that backdrop.

But then again, master investor Warren Buffett picked the same week in 2009 to say how much he loved bank stocks: "The banks are getting their money very cheaply, deposits are coming in, spreads have never been wider, all the new business they're doing is terrific. They will earn their way out of it [in the] overwhelming number of cases."

As it turns out, Buffett was right. It didn't take long for the surviving megabanks to earn back their subprime losses, fueling the share-price gains seen in the chart above. Here's JPMorgan's basic performance as an example (with the 2008 recession shaded in):

JPM Net Income (TTM) Chart

JPM Net Income (TTM) data by YCharts.

Long story short, five years of perspective makes it much easier to find the investing lessons from the 2008 crash. Keep these nuggets of insight in mind the next time a major market correction rears its ugly head -- it might be another wealth-building blessing in disguise!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$35,098.61 (0.57%) $199.27
Citigroup Inc. Stock Quote
Citigroup Inc.
C
$64.88 (-0.95%) $0.62
Bank of America Corporation Stock Quote
Bank of America Corporation
BAC
$45.39 (-0.82%) $0.37
JPMorgan Chase & Co. Stock Quote
JPMorgan Chase & Co.
JPM
$161.09 (-0.52%) $0.84

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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