The following is the S&P 500’s chart in 2001.
*Read the entire history of the U.S. stock market here.
The bear market of 2000-2002 was very different from the bear market of 2007-2009. While 2007-2009 was an economic crisis, the economic and earnings recession of 2001 was mild. More importantly, the economy and earnings deteriorated in a very orderly manner without many scary headlines. Throughout the first half of 2001, every company in every industry (particularly tech) consistently stated that “our sales and earnings are declining, so we’ll probably miss expectations”. These warnings came out in a very orderly fashion without any panic, unlike 2008.
The U.S. economy was deteriorating throughout all of 2001. The deterioration started to slow down in December 2001, and by Q1 2002 many sectors of the economy were growing again. In addition, earnings started to bottom in Q4 2001 (released in January 2002). We ignore GDP because GDP isn’t a real-time economic indicator.
Aside from tech companies imploding and 9/11, the media was relatively quiet in 2001.
Jan 2, 2001: PMI fell significantly. This was significant because it prompted the Fed’s first interest rate cut of this cycle.
January 3, 2001: In between regular meetings, the Fed cut rates from 6.5% to 6% on this day. The S&P spiked on this day, then gave back those gains over the next 3 days, then rallied for the rest of the month.
Some investors believe that the first rate cut of a cycle is bullish for stocks. History does not validate this belief. The S&P also rallied 1 more month after the Fed’s first rate cut on September 18, 2007. However, the S&P did not rally after the first rate cuts of the 1990s, 1980s, and 1970s. In those cases, the S&P was either flat or down over the next month.
January 31, 2001: The S&P topped on this day when the Fed cut rates for the 2nd time. Then the S&P got killed in February.
A similar pattern happened in October 2007. The S&P rose for 1 month after the Fed cut rates for the first time. Then the S&P fell after the Fed cut rates for a second time. This pattern did not exist in the 1990s, 1980s, and 1970s.
The S&P went up during Q1 2001 earnings season (released in April). In a bear market, the S&P is always either flat or up during earnings season. The S&P never falls significantly during earnings seasons within bear markets, no matter how bad the earnings are.
Because companies continuously warned analysts of profit declines throughout 2001, expectations during each quarter were set very low. Overall, companies beat Q1 earnings expectations. This applied to the tech sector, banks, and other big name corporations.
April 18, 2001: The Fed surprised markets with another 0.5% rate cut. The S&P soared on this day and continued to rally in the weeks after that. This rate cut was just an excuse for the S&P to rally. Historical rate cuts have no correlation with stock market rallies.
The mid-March to late-May 2001 rally was the first real rally of this bear market. It lasted 2 months, which is pretty standard for a bear market rally. In addition, it retraced 50% of the March 2000 – March 2001 decline.
To illustrate how terrible GDP is as an economic indicator, GDP in Q1 2001 (released on April 27) increased at a 2% annualized rate! Keep in mind that most economic data released during this time were terrible. GDP lags like crazy.
May 1, 2001: House and Senate Republicans agreed to a $1.35 trillion tax cut over 11 years. It was guaranteed to pass because the Republicans controlled Congress and the White House. This news had no real impact on the S&P in the short term or medium term.
May 24, 2001: One Republican senator switched from being a Republican to being an independent. Thus Republicans lost control of Senate to the Democrats because they previously held a very slim majority. This threw into doubts the chances of the proposed tax cuts being passed by Congress.
The rate of deterioration for some corporate earnings had started to slowdown by Q2 2001 earnings season (released in July).
Contrary to what some investors think, 9/11 was not the only thing that caused the S&P to crash in September 2001. The S&P was going down slowly and incessantly in August and this downwards decline picked up pace from September 4 to September 10. The terrorist attacks on 9/11 merely caused the S&P to fall faster, but it didn’t trigger the decline. The S&P was going down anyways.
The U.S. immediately wanted to go to war against Afghanistan for harboring Osama bin Laden after September 11. War officially began on October 7.
September 17, 2001: Markets got crushed on this day after it reopened for the first time since 9/11. The S&P fell 5% to new lows below the previous wave’s low in March 2001. As you can expect, airline and insurance stocks fell the most. The S&P fell until September 21. The bottom had no news/fundamentals associated with it.
9/11 resulted in a sudden increase in the rate of economic deterioration. This deterioration lasted until December 2001, even though S&P had been rallying from Sept 21 – December, 2001. This divergence between the economy and the S&P shows that the stock market and U.S. economy aren’t perfectly correlated. That’s why we use economic indicators for our long term outlook but not our medium term outlook.
The S&P did not effectively break above its 200 daily moving average during the September 21 – December 2001 rally. It made a triple top in December 2001, January 2002, and March 2002.
Q3 2001 earnings season (released in October) was the same story as the rest of 2001: earnings were still declining, but still beating estimates because the companies helped guide estimates low enough. The U.S. stock market had no reaction to this earnings season.
The Enron scandal became publicized in October 2001. The SEC announced that it was investigating Enron on October 22. A potential merger with Dynergy failed on November 28, and Enron filed for bankruptcy on December 3. Although the media said that the Enron caused U.S. stocks to fall, this is a lie! The U.S. stock market completely ignored the Enron scandal as it rallied from October to December. Only when it became clear in 2002 that accounting scandals were prevalent in Corporate America did the S&P fall.
Economic data released in the last week of December 2001 showed that the economy was starting to improve.
Argentina defaulted on $132 billion of its debt during the last week of December. This had no impact on the U.S. stock market. Foreign events do not cause big rallies/corrections in U.S. equities.