The following is the S&P 500 chart in 2008.
*Read the entire history of the U.S. stock market here.
Although the U.S. housing market (new home sales, housing starts, housing permits) peaked in early 2006, the S&P 500 peaked in October 2007. This is an account of 2008, the main year of the 2007-2009 bear market.
January 3, 2008: Big 3 Detroit automakers (Ford, GM, Chrysler) started to see big monthly decline in sales. This was a huge increase in the rate of decline.
January 4, 2008: The monthly Employment Report for December 2007 was released, and it was terrible: employment witnessed a big decline. Previously, this was the only good economic data left in the U.S. (all other economic data had deteriorated by the end of 2007). Now investors started to fear that a U.S. recession might occur. However, no one thought that a bear market would ensue. Most investors believed that a 20% correction like that of 1990 would ensue.
With elevated oil prices in January (just below $100 a barrel) in the face of a potential recession, investors started to fear stagflation. “Stagflation” became the buzzword that financial media talked about every day.
By early-January, there were rumors that CountryWide Financial and Washington Mutual (massive financial institutions) were facing significant problems and potential bankruptcy.
January 11, 2008: Bank of America bought CountryWide Financial, saving it from bankruptcy.
February 12, 2008: Warren Buffett announced his plan to help out bond insurers MBIA and Ambac. He quickly withdrew his offer because market and economic conditions were deteriorating so fast that he couldn’t value the bonds accurately.
February 13, 2008: President Bush signed a $170 billion fiscal stimulus package.
When oil crossed above $100 for good in late February, “stagflation” fears grew really loud. $100 had been a massive psychological resistance level before late-February.
March 14, 2008: Prior to this date, Bear Stearns stock was sinking on fears that it would go bankrupt. On March 14, the NY Fed agreed to loan $25 billion to Bear Stearns. The NY Fed then quickly announced that it was withdrawing the loan. Hours later, the NY Fed said it was buying $30 billion of Bear Stearns’ assets. On March 16, JPMorgan acquired Bear Stearns for $2 per share. This marked the beginning of the 2007-2009 bear market’s 1st big rally. The rally lasted all the way into mid-May when the S&P stopped at its 200 day moving average resistance. When Bear was acquired, many investors thought that the worst of the crisis was over.
April: Before Q1 2008 earnings season (released in April), investors and the media hoped that Wall Street banks would recover and the financial crisis would resolve on its own. That’s why they wanted to see how Q1 earnings season for the banks would turn out. Banks reported terrible earnings in April, but the S&P and finance stocks still rallied.
By May 2008, inflation fears soared because oil reached $120 and then $130. This coincided with the S&P’s top at its 200 moving average resistance.
The S&P fell in another massive downwave from mid-May to mid-July. During this time, there was a very strong inverse correlation between the S&P and oil, which soared to its bull market high of $147 a barrel.
Rising oil prices meant that inflation was rising. Investors were afraid that rising inflation would cause the Fed to raise interest rates while the economy was on the verge of falling into a recession. Bernake’s comments at speeches merely confirmed this fear.
In late May and early June, there were a ton of reports that the banks Lehman, Wachovia, Washington Mutual, and Citi would need to raise much more capital than expected to shore up their balance sheets. So anyone who was buying the May-July rally would have known that it was merely a bear market rally. The financial system was clearly still deteriorating.
By mid-June, the media started talking about problems with GM and Ford, which suffered huge losses (partially because soaring oil prices caused auto sales to crash). Now it was clear that not 1, but 2 sectors of Corporate America (finance and autos) were in crisis mode.
Then the Fannie Mae and Freddie Mac crisis began. These were massive financial institutions that insured half of the U.S. mortgage market.
July 11, 2008: Th NYTimes stated that the U.S. government was considering various ways to bailout Fannie and Freddie, whose mortgage loans were being decimated by the crisis. This report caused Fannie’s stock to crash (again).
September 7, 2008: The FHFA (Federal Housing Finance Agency) stated that it was taking control of Fannie and Freddie.
Banks reported huge losses for Q2 2008 (released in July) just as they did for Q1 2008. But there were some reports that various banks had “received $5-$10 billion in recapitalization” in early July. So there’s a small chance that the banks can raise enough capital to offset their losses. If this had occurred, the big correction might not have turned into a bear market and the recession might have ended.
The last straw that broke the camel’s back was on July 29. Merill Lynch announced that it was selling $11 billion in mortgage securities next quarter. Up until that moment, banks had avoided selling too many mortgage securities because they knew that their selling in a market on life support would kill the market. They wanted to wait and see if the market could recover on its own. Merill and other banks gave up all hope in late-July. Their combined selling killed stocks in Q3 and Q4 2008. Everyone rushed for the exit gates at the same time.
August 26, 2008: Wachovia Group and Merill Lynch were hit with massive loan refinancing bills, so some other banks stopped trading with these 2 banks. There feared that Wachovia and Merill would go bankupt.
Starting on the first day of September, the S&P and oil went from a strong inverse correlation to a strong positive correlation. The S&P and oil both fell due to a “weak economy” theme.
Although the U.S. economy had clearly started to deteriorate by 2007, global growth (i.e. China driven) only started to slow down in early September 2008.
September 14, 2008: Congress was getting desperate now. Later Congressional testimonies would reveal that Bank of America was coerced by the government into acquiring Merill Lynch. Bank of America quickly announced that it was looking to buy Merill.
September 15, 2008: Lehman Brothers (4th largest investment bank) declared bankruptcy.
September 16, 2008: AIG received a $85 billion federal bailout.
September 23, 2008: Warren Buffett bought $5 billion of warrants from Goldman Sachs. This paid 7% interest and allowed Buffett to buy Goldman stock in the future at a preset price. Buffett clearly knew which banks the government would bailout. His political connections would have allowed him to sidestep landmines such as Lehman and AIG and invest in future bailout recipients such as Goldman.
September 25, 2008: Washington Mutual Inc was stripped apart. The government took control of Washington Mutual Bank while JPMorgan bought other Washing Mutual subsidiaries. The shell company Washington Mutual Inc declared bankruptcy the next day.
September 29, 2008: Wachovia was on the brink of bankruptcy due to massive deposit withdrawals following Washington Mutual’s bankruptcy. The Federal Deposit Insurance Corporation (FDIC) announced that Wachovia was “too big to fail” and coordinated a deal for Citigroup to purchase Wachovia’s retail banking units. Wells Fargo tried to buy all of Wachovia on October 3, and Citigroup allowed this new merger to go through on October 9.
Congress failed to pass a $700 billion TARP deal (bailout package for financial institutions) on September 29, but passed TARP on October 3 after another vote. The U.S. government started to buy billions of dollars worth of commercial paper beginning on October 7.
By early October, it seemed as if the worst was over. All the banks that needed saving had been saved and a bailout package had been approved. However, the biggest chunk of the bear market crash happened AFTER October 3. This demonstrates why our investment model is not based on news or events. It’s impossible to predict when a market will “sell the news” and when a market will “rally on the news”.
It’s worth mentioning that from late-September the first half of October, the U.S. government (Congress, Federal Reserve, Treasury) literally initiated new policies every day to save the U.S. stock market and economy.
The S&P crashed from the beginning of October to October 10. The media and investors began to wonder if the bear market would end here. The S&P was merely 80 points above its 2003 bear market bottom, which was a massive support level.
After the November 4th election, the S&P “sold the news” of an Obama victory. It’s impossible to consistently predict how the stock market will react to elections.
By early November, almost the entire financial sector had been bailed out. Now that a financial sector collapse had been avoided, the government turned its attention to the auto sector.
November 6, 2008: GM and Ford announced massive year-over-year declines in sales (GM sales were down 45%). There was news that GM was trying to get a government bailout. GM showed losses of $4.2 billion in Q3 2008 while Ford showed losses of $3 billion, which were much worse than expected. GM said that it was running out of cash and that merger talks with Chrysler had failed.
With GM and Chrysler on the brink of bankruptcy (Ford was in slightly better shape because it had secured a massive loan in 2007 before the crisis), everyone knew that the Big 3 were too big to fail. Millions of more workers would be laid off and the Recession might turn into a Depression. Yet Congress still spent a month debating the merits of bailing out “too big to fail” companies. This was a ridiculous ethical facade. No politician is going to let a Depression happen on their hands, regardless of the “ethical implications”.
November 9, 2008: China announced a 4 trillion Yuan stimulus package. Despite China having a much smaller economy, the size of this stimulus package was almost equivalent to the stimulus package that Obama would unveil in 2009. It’s important to remember that commodity prices (gold, silver, oil, energy) bottomed right around this time, which is when Chinese equities bottomed. From 2002-2011 China was the main driver of commodity prices.
Citigroup was on the verge of bankruptcy even though it had received a $25 billion from TARP. Citigroup announced that it would fire 52,000 employees on November 17. So the U.S. government announced a massive bailout package for Citigroup on November 23. By now, all the main U.S. banks had been saved or bailed out.
December 5, 2008: This was the first report from the White House stating that an automaker bailout deal was close to being reached.
December 10, 2008: A $14 billion bailout package for the Big 3 was approved by Congress. Bush signed it immediately.
With the finance and auto sectors bailed out, a collapse of individual Corporate America sectors had been averted. However, economic data released in December (for November) showed that the economy was deteriorating at a MUCH FASTER rate than before. The increase in the economy’s rate of deterioration (second order derivatives) is what caused the S&P to continue falling from January to early-March 2009.