The Crash of the Stock Market in 2008 Explained in Detail

The Crash of the Stock Market in 2008 Explained in Detail

Learn why the stock market plummeted by following this timeline.

The Difficult Situation

The stock market crashed on September 29, 2008. The Dow Jones Industrial Average fell 777.68 points in intraday trading. Until the stock market crash of March 2020, which coincided with the commencement of the COVID-19 pandemic, it was the largest point drop in history.

The first rejection of the Emergency Economic Stabilization Act of 2008, often known as the “bank rescue proposal,” by Congress contributed to the market catastrophe.

On the other hand, the tensions that contributed to the disaster had been building for some time.

On October 9, 2007, the Dow Jones Industrial Average reached its pre-recession high of 14,164.53. By March 5, 2009, it had decreased by more than half, to 6,594.44.2. It wasn’t the biggest decline in percentage in history, but it was devastating.

The stock market dropped by more than 90% during the Great Depression. This, however, took nearly four years to complete. The 2008 financial crisis happened in under 18 months.

 The 10 Worst One-Day Losses in the Dow Jones Industrial Average

The events leading up to the 2008 stock market crash are depicted in the timeline below.

2007

At the start of the year, the Dow Jones Industrial Average was trading at 12,474.52.2. Despite repeated warnings, the subprime mortgage crisis has only worsened. On December 19, 2006, the US Department of Commerce warned that October’s new home permits were 28 percent lower than the previous year. Economists, on the other hand, did not expect the housing slump to affect the rest of the economy. They were relieved to see that the overheated real estate market was beginning to cool down.

Subprime mortgage defaults, on the other hand, were fueled by falling house values.

By August 2007, the Federal Reserve had decided that banks didn’t have enough money to run.

The Fed began pumping liquidity by purchasing subprime mortgages from banks.

In October, economists warned about the growing popularity of collateralized debt obligations (CDOs) and other derivatives.

As the year came to a close, the Bureau of Economic Analysis (BEA) boosted its growth projection.

According to the data, the country’s gross domestic product increased by 0.5 percent in the third quarter. According to previous projections, it has shrunk by 0.5 percent. The US economy appeared to be able to survive the collapse of the property market and bank liquidity constraints. The Dow Jones Industrial Average ended the year at 13,264.82.2, only a smidgeon below its October high.

 2008

At the end of January, the BEA revised its fourth-quarter 2007 GDP growth estimate downward.

The increase rate was only 0.6 percent, according to the report. For the first time since 2004, the American economy lost 17,000 jobs. The news didn’t affect the Dow Jones Industrial Average, which stayed in the range of 12,000 to 13,000 until March.

On March 17, the Federal Reserve stepped in to preserve Bear Stearns, a failing investment bank. Before recovering, the Dow dropped to an intraday low of 11,650.44. Many individuals anticipated that the Bear Stearns bailout would keep the stock market from falling into a bear market. The Dow had surged to almost 13,000 points by May. It looked like the worst was over.

In July 2008, the issue endangered the government-sponsored agencies, Fannie Mae and Freddie Mac. They are in need of government aid. The Treasury Department guaranteed Fannie Mae and Freddie Mac’s loans and bought stock in the corporations. The Federal Housing Administration insures new loans worth $300 billion. On July 15, the Dow Jones Industrial Average fell to 10,962.54. It recovered and remained above 11,000 points for the rest of the summer.

 That year’s September

The month started out with some bad news. On September 15, 2008, Lehman Brothers declared bankruptcy. The Industrial Average of Dow Jones dropped over 200 points.

On Tuesday, September 16, 2008, the Federal Reserve announced that it was bailing out insurance mammoth American International Group, Inc. It acquired control of the corporation after making an $85 billion loan in exchange for 79.9% of its stock. AIG has run out of cash. It was about to default on credit default swaps it had issued against now-defunct mortgage-backed assets (MBS).

In the days following Lehman Brothers’ bankruptcy, money market funds lost $196 billion.

This is where the bulk of businesses keep their overnight cash. Businesses were worried and moved to Treasury bills, which are much safer. They did this because LIBOR rates were so high. Interest rates have soared because banks were afraid of lending to each other. On September 17, 2008, the Dow Jones Industrial Average fell 449.36 points.

On Thursday, September 18, 2008, the stock market rallied by more than 400 points.

A new bank bailout scheme has piqued the interest of two investors.

On Friday, September 19, 2008, the Dow finished the week at 11,388.44.2, just a few points below its Monday open of 11,416.37. The Federal Reserve developed the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility. It lent money to banks so that they could buy commercial paper from money market funds. The credit markets were temporarily suspended and in panic mode as a result of the Fed’s statement.

On September 20, 2008, Secretary Henry Paulson and Federal Reserve Chair Ben Bernanke sent the bank rescue bill to Congress. The Dow was hovering around 11,000 points until September 29, 2008, when the Senate voted down the bailout deal. The Dow lost 777.68 points during intraday trading.

Markets all over the world were in a panic as well:

  • The Brazilian stock exchange, the Bovespa, was shut down after plunging 10% in 19 days.
  • In just 20 minutes, London’s FTSE 100 index dropped 5.3 percent.
  • Gold’s daily price has nearly crossed $900 per ounce.
  • Oil has dropped in price to $95 per barrel.
  • In an attempt to restore financial stability, the Fed raised its currency swaps with foreign central banks in Europe, England, and Japan to $620 billion.

The world’s governments were committed to providing the frozen credit markets with all available liquidity.

 In October of that year

Congress finally approved the bailout proposal in early October, but the damage had already been done.

The economy lost 159,000 jobs in the prior month, according to the Labor Department. On Monday, October 6, 2008, the Dow Jones Industrial Average dropped 800 points, going below 10,000 for the first time since 2004.

The Fed attempted to support banks by lending $540 billion to money market funds. The funds needed money to keep up with a regular inflow of redemptions. Since August, almost $500 billion has been withdrawn from prime money markets.

JPMorgan Chase manages the Fed’s Money Market Investor Funding Facility (MMIFF).

It purchased up to $600 billion in certificates of deposit, banknotes, and commercial paper that were due in 90 days. The remaining $60 billion came from the money markets directly. The MMIFF, on the other hand, was selling commercial paper to them.

The Federal Reserve quickly lowered the fed funds rate to only 1%.

The Libor bank lending rate, on the other hand, remained at a high of 2.58 percent.The Fed was also in charge of the worldwide central bank rescue.

As a result, the Dow Jones Industrial Average dropped 15% during the course of the month.

At the end of October, the BEA delivered more bad news. In the third quarter, the economy dropped by 0.3 percent. The economy of the country was in free fall.

 In November of that year

The month began with more bad news. According to the Labor Department, the economy lost a staggering 240,000 jobs in October. AIG’s bailout has already surpassed $150 billion. A portion of the $700 billion bailout cash, according to the Bush administration, will be used to buy preferred shares in the countries’ banks.

The top three automakers asked for help from the government. By November 20, 2008, the Dow had plunged to a new low of 7,552.29, a record low. The stock market crash of 2008, on the other hand, was far from over.

December 2008 was a month of transition

The federal funds rate was slashed to 0%, the lowest level in history, by the Federal Reserve.

The Dow Jones Industrial Average closed the year at a dismal 8,776.39, a drop of over 34%.

 2009

Investors bet that the incoming Obama administration, with its team of economic advisers, would be able to overcome the recession, and the Dow soared to 9,034.69.2 on January 2, 2009. The bad news about the economy, on the other hand, remained. On March 5, 2009, the Dow Jones Industrial Average recorded a low of 6,594.44.37.

President Barack Obama’s economic stimulus plan came soon after, giving Americans the confidence they needed to relax. On July 24, 2009, the Dow Jones Industrial Average reached a new high. It closed at 9,093.24, up from a high of 9,093.24 in January. For the most part, the stock market crash of 2008 was over.

Aftermath

Investors had to carry the emotional scars of the disaster for the next four years. On June 1, 2012, they were terrified due to a poor May jobs report and the European economic crisis. The Dow Jones Industrial Average dropped by 275 points. The 10-year Treasury note yield has dropped to 1.47 percent. The harvest this year was the lowest in nearly 200 years. It showed that Wall Street’s trust hasn’t fully come back since the 2008 financial crisis.

In 2013, the stock market fully rebounded. Due to an asset bubble, stock prices outperformed earnings. The Dow continued to hit new highs until February 2018. Fears of inflation and rising interest rates pushed the Dow to its lowest point since 1961. It did not cause a recession, unlike many past stock market meltdowns.

The Dow closed at 23,327.46.42 in August 2018, signaling the conclusion of the decline. It reached a new high of 27,359.16 in July of this year.

Concerns about President Donald Trump’s trade wars caused the stock to plummet.

 When did the stock market crash in 2008?

The market correction that led to the 2008 financial crisis began a year earlier, in October 2007. Following the market’s highs in October 2007, it fell steadily for nearly a year before crashing on September 29, 2008. The losses persisted over the next six months, reaching a bottom in March 2009.

 When the stock market crashed in 2008, how long did it take for it to recover?

It took over five years for stocks to recover from the market’s decline, which included the 2008 financial crisis. The Dow Jones Industrial Average reclaimed its October 2007 highs in March 2013.

 Is it possible that the stock market may crash again?

Without a doubt, Stock markets reflect the state of the economy and people’s hopes for future growth and wealth. Extreme events, such as a natural disaster, a war, or an epidemic, can cause panic selling and a market crash. A severe economic downturn can produce comparable results. As a result, while market crashes are uncommon, they are a recurrent occurrence.

Last Thoughts

The stock market crash of 2008 was sparked by defaults on aggregated mortgage-backed securities. Subprime mortgages made up the majority of MBS. These loans were made available to almost everyone, including those with bad credit, by banks.

When the property market plummeted, many homeowners defaulted on their debts. These defaults shocked the banking industry, which had heavily invested in MBS. As a result, businesses that do business with these banks have experienced losses, as have their stock prices.

Because of the severity of the banking crisis, the stock market in the United States has lost faith. As a result of the financial crisis of 2008, the stock market plummeted.

In the United States, the stock market did not fully recover until mid-2013.

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