Tuesday, March 19, 2019

Stock market selloffs

BY KIMBERLY AMADEO  Updated November 06, 2018

The stock market crash of 2008 occurred on September 29, 2008. The Dow Jones Industrial Average fell 777.68 points in intra-day trading. Until 2018, it was the largest point drop in history. It plummeted because Congress rejected the bank bailout bill. But the stresses that led to the crash had been building for a long time. 

On October 9, 2007, the Dow hit its pre-recession high and closed at 14,164.43. By March 5, 2009, it had dropped more than 50 percent to 6,594.44. Although it wasn't the greatest percentage decline in history, it was vicious.

The stock market fell 90 percent during the Great Depression. But that took three years. The 2008 crash only took 18 months.

The chart below ranks the 10 biggest one-day losses in Dow Jones history. Today, the September 29 point drop is still the third biggest.

This timeline will give you a detailed play-by-play explaining how the 2008 stock market crash happened.

The Dow opened the year at 12,459.54. It rose despite growing concerns about the subprime mortgage crisis. On November 17, 2006, the Commerce Department warned that October's new home permits were 28 percent lower than the year before. But economists didn't think the housing slowdown would affect the rest of the economy. In fact, they were relieved that the overheated real estate market appeared to be returning to normal.

But falling home prices triggered defaults on subprime mortgages.

By August 2007, the Federal Reserve recognized that banks didn’t have enough liquidity to function.

The Fed began adding liquidity by buying banks’ subprime mortgages. In October, economists warned about the widespread use of collateralized debt obligations and other derivatives. In late November, Treasury Secretary Hank Paulson launched a bank-funded Superfund to purchase toxic bank debt.

As the year drew to a close, the Bureau of Economic Analysis revised its growth estimate higher. It said that the nation’s gross domestic product had increased 0.5 percent in the third quarter. Its prior estimate said it had shrunk 0.5 percent. It seemed the U.S. economy could shrug off a housing downturn and banks’ liquidity constraints. The Dow ended the year just slightly off its October high, at 13,264.82.

At the end of January, the BEA revised its fourth-quarter GDP growth estimate down. It said growth was only 0.6 percent. The economy lost 17,000 jobs, the first time since 2004. The Dow shrugged off the news and hovered between 12,000 and 13,000 until March.

On March 17, the Federal Reserve intervened to save the failing investment bank, Bear Stearns. The Dow dropped to an intra-day low of 11,650.44 but seemed to recover. In fact, many thought the Bear Stearns rescue would avoid a bear market. By May, the Dow rose above 13,000. It seemed the worst was over.

In July 2008, the crisis threatened government-sponsored agencies Fannie Mae and Freddie Mac. They required a government bailout. The Treasury Department guaranteed $25 billion of their loans and bought shares of Fannie's and Freddie's stock. The Federal Housing Authority guaranteed $300 billion in new loans. On July 15, the Dow fell to 10,962.54. It rebounded and remained above 11,000 for the rest of the summer.

September 2008
The month started with chilling news. On Monday, September 15, 2008, Lehman Brothers declared bankruptcy. The Dow dropped 504.48 points.


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