On September 29, 2008, the stock market crashed. During the course of the day, 777.68 points were lost on the Dow Jones Industrial Average. It was the greatest point decrease in history until the stock market meltdown in March of 2020, which marked the beginning of the COVID-19 pandemic.
The initial rejection of the Emergency Economic Stabilization Act of 2008 by Congress, also known as the bank rescue package, contributed to the market fall.1 The pressures that ultimately caused the crash, however, had been mounting for quite some time.
The Dow finished at 14,164.53 on October 9, 2007, its all-time high prior to the Great Recession. On March 5, 2009, it decreased by more than half, reaching a new all-time low of 6,594.44.2 Even if the percentage drop wasn’t unprecedentedly large, the ensuing chaos was.
Note
During the Great Depression, the stock market dropped by over 90%. But it took nearly four years to accomplish. Only 18 months passed before the 2008 crisis.32
Listed in the table below is the order of the 10 largest single-day drops in the Dow Jones Industrial Average.
The Dow’s Ten Worst One-Day Drops
The events leading up to and including the 2008 stock market meltdown are detailed in the timeline below.
2007
The year began with a Dow opening at 12,474.52.2. It went up despite mounting fears of a deeper impact from the subprime mortgage crisis. The U.S. Department of Commerce issued a cautionary report on new housing permits being 28% lower in October than in October 2005.4 Economists, however, did not anticipate a widespread impact from the housing market decline. They were actually relieved to see signs that the real estate market was cooling down.5
However, defaults on subprime mortgages were precipitated by dropping housing prices.
Note
The Federal Reserve Board acknowledged that banks lacked sufficient liquidity by August 2007.6
When banks ran low on cash, the Fed stepped in to acquire their subprime mortgages.7 Economists sent a red flag in October on the extensive usage of derivatives like collateralized debt obligations.
The Bureau of Economic Analysis (BEA) increased its growth forecast as the year came to a conclusion.8 According to the report, GDP grew by 0.5% year-on-year in the third quarter. The last appraisal suggested a decrease of 0.5%. The housing slowdown and bank liquidity limitations appeared to be manageable for the U.S. economy. At 13,264.82.2, the Dow finished the year down from its peak in October.
2008
The BEA lowered its GDP growth forecast for the fourth quarter of 2007 at the end of January.9 Only 0.6% growth was reported. In a first since 2004, the economy shed 17,000 jobs.10 In spite of the news, the Dow continued to trade in a narrow range between 12,000 and 13,000 until March.2
Bear Stearns, an investment bank, was saved from collapse on March 17 thanks to Federal Reserve intervention. The Dow hit a low of 11,650.44 during the day but has since recovered. Many people had hopes that the Bear Stearns bailout would prevent a market crash. In May, the Dow reached a new high of 13,002.2 The situation looked to have stabilized.
Fannie Mae and Freddie Mac, government-sponsored mortgage finance companies, were challenged by the crisis in July of 2008. They needed a bailout from the government. Shares of Fannie Mae and Freddie Mac stock were purchased, and the Treasury Department guaranteed loans totaling around $25 billion.11 New loans totaling $300 billion were insured by the Federal Housing Administration.12 The Dow dropped to 10,962.54 on July 15th. For the rest of the summer, it remained above 11,000 and continued its upward trend.2
This month in 2008: September
Frightening reports kicked off the month. Bankruptcy was filed for by Lehman Brothers on September 15, 2008. Over 200 points were lost on the Dow.2
The Federal Reserve said on Tuesday, September 16, 2008, that it will be providing financial assistance to the insurance firm AIG. By lending $85 billion and receiving 79.9 percent ownership in return, it effectively acquired the company. AIG’s coffers were empty. It was rushing to cover the costs of credit default swaps it had issued against mortgage-backed securities (MBS) that were now in default.13
Money market funds lost $196 billion in the days following the collapse of Lehman Brothers.14 Most companies keep their overnight funds there. Businesses had panicked and started buying Treasury notes instead. Since Libor rates were so high, they took this action. Because banks were hesitant to lend to one another, rates have increased. The Dow lost 449.36 points on September 17, 2008.2
On Thursday, September 18th, 2008, markets climbed back up by over 400 points.2 The news of a fresh bank rescue plan reached the investing community.
With a close on Friday, September 19, 2008, of 11,386.44, the Dow finished the week just below its Monday open of 11,416.37.15. A money market mutual fund liquidity facility for Asset-Backed Commercial Paper was created by the Federal Reserve.16 Money market funds were given loans so that banks could purchase commercial paper. The Fed’s statement verified the widespread fear and partial shutdown of credit markets.
The bank rescue measure was delivered to Congress on Saturday, September 20, 2008, by Secretary Henry Paulson and Federal Reserve Chair Ben Bernanke. The Dow hovered around 11,000 until the Senate rejected the bailout bill on September 29, 2008.17 During the course of the day, the Dow fell by 777.68 points.18 Markets around the world also experienced a panic:
After a 10% loss, trading on Brazil’s stock exchange was halted.19
The FTSE in London fell 5.3%.20 The price of gold came close to $900 per ounce.The price of oil fell to $95 per barrel in 21.
The Federal Reserve quadrupled the amount it swaps currencies with the European Central Bank, the Bank of England, and the Bank of Japan to $620 billion in an effort to restore financial stability.23 All of the credit market liquidity came from governments around the world.
The month of October in 2008
Early in October, Congress passed a bailout measure, but by then it was too late.24 In the previous month, the economy lost a staggering 159,000 jobs, according to the Labor Department.25 The Dow Jones Industrial Average fell 800 points on Monday, October 6, 2008, and ended the day below 10,000 for the first time since 2004.26
To help stabilize financial institutions, the Federal Reserve lent $540 billion to money market funds. The money was necessary for the funds to deal with the constant stream of redemption requests. About $500 billion had been taken out of the prime money markets since August.27
The Federal Reserve’s Money Market Investor Funding Facility (MMIFF) was handled by JPMorgan Chase.28 It bought up to $600 billion in short-term debt instruments with maturities of 90 days or less, including CDs, banknotes, and commercial paper. Sixty billion more came from the money markets. However, the MMIFF was also selling commercial paper to them.
The Federal Reserve swiftly reduced the fed funds rate to 1%.29 In contrast, the Libor bank lending rate maintained a high of 2.58%.30 The Fed also oversaw a bailout of central banks worldwide.31
As a result, the Dow fell by 15% throughout the course of the month.32 By the month’s end, the BEA had revealed additional discouraging data. The third-quarter GDP decline was 0.3%.33 A national slump has set in.
November of 2008
More negative news came at the start of the month. In October, the economy shed a shocking 240,000 jobs, according to the Labor Department.34 The cost of saving AIG now exceeds $150 billion.35 It was announced by the Bush administration that a portion of the $700 billion bailouts would be used to purchase preferred stocks in the nations’ banks.36
A federal bailout was requested by the Big Three automakers. By the 20th of November, 2008, the Dow had fallen to a new low of 7,552.29.2 However, the 2008 stock market meltdown was far from done.
Last month of 2008
The Federal Reserve Board recently made history by lowering the fed funds rate to zero percent.29 With a loss of nearly 34% for the year, the Dow Jones Industrial Average closed at a dismal 8,776.39.2
2009
The Dow reached a new high of 9,034.69 on January 2, 2009.2 The financial community had faith that the Obama administration’s economic team could stabilize the economy. However, the economy news didn’t improve. The Dow Jones Industrial Average hit a low of 6,594.44.37 on March 5, 2009.
The worry was quickly put to rest, though, thanks to President Obama’s stimulus package for the economy. The 24th of July, 2009, was the day the Dow hit a new all-time high. It finished the day at 9,093.24, which was higher than its all-time high from January.38 The 2008 stock market meltdown had, for the most part, run its course.
Aftermath
For the following four years, investors carried the emotional scars of the crash. The dismal jobs report for May and the ongoing crisis in the eurozone caused widespread fear on June 1, 2012. 275 points were lost on the Dow.39 Yield on the benchmark 10-year Treasury note fell to 1.47.40 percent. The last time yields were this low was over 200 years ago.41 It was a warning that Wall Street still lacked the trust that had vanished in 2008.
The stock market started to improve in 2013. The asset bubble was caused by the rapid increase in stock values relative to earnings. The Dow Jones Industrial Average (Dow) kept breaking milestones until February of 2018.2 Inflation and interest rate fears caused the Dow to go into its deepest correction since 1961. A recession did not follow, as it had not followed many previous stock market disasters.
The market bottomed out in August of 2018, with the Dow closing the year at 23,327.46.42 In July of this year, it reached a new high of 27,359.16.43 Then it started going down because they were worried that President Trump would start a trade war.
The 2008 stock market crash occurred at what time?
The slide in the stock market that culminated in the crash of 2008 had started a year earlier, in October 2007. A stock market crisis occurred on September 29, 2008, over a year after the market peaked in October 2007. These declines continued throughout the subsequent months, reaching a trough in March of 2009.
When did the economy finally start to improve after the 2008 stock market crash?
After the market meltdown of 2008, it took equities almost five years to make up for the loss. In March 2013, the Dow Jones Industrial Average reached a new high not seen since October 2007.2
Do Stock Market Crash"s Happen Often?
It goes without saying. The stock market reflects the mood of investors and their confidence in the economy’s potential for growth and prosperity. People may sell all they own in a panic if something catastrophic like a natural disaster, war, or epidemic happens. A sharp drop in the economy can have the same effect. So, even though they don’t happen often, market crashes are a constant.
In Conclusion
When investors lost faith in pooled mortgage-backed securities in 2008, the stock market crashed. The majority of MBS consisted of subprime mortgages. Almost everyone, including those with poor credit, might get one of these loans from Banks.
Many homeowners stopped making their loan payments after the housing market crashed. The financial sector felt the effects of these defaults since it had invested extensively in MBS. As a result, businesses that dealt with these financial institutions saw their stock prices fall.
The magnitude of the banking crisis triggered a loss of faith in the U.S. stock market. The autumn of 2008 stock market crisis had an unintended consequence.
In the United States, the stock market did not fully rebound until the middle of 2013.
