Thestock market crashof 2008 occurred on September 29, 2008.The Dow Jones Industrial Averagefell by 777.68 points in intraday trading. Until the stock market crash of March 2020 at the start of the COVID-19 pandemic, it was the largest point drop in history.
The market crashed, partly, because Congress initially rejected the Emergency Economic Stabilization Act of 2008, popularly known as 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-recessionhigh and closed at 14,164.53. By March 5, 2009, it had dropped by more than 50% to 6,594.44. Although it wasn't the greatest percentage decline in history, it was vicious.
The stock market fell nearly 90% during the Great Depression. But that took almost four years. The 2008 crash only took 18 months.
The chart below ranks the 10 biggest one-day losses in Dow Jones Industrial Average history.
10 Biggest One Day Losses for the Dow
The timeline below explains exactly how the 2008 stock market crash happened.
The Dow opened the year at 12,474.52. It rose despite growing concerns about the subprime mortgage crisis. OnDecember 19, 2006, the U.S. Department of Commerce warned that October's new home permits were 28% fewer 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 Reserverecognized thatbanks didn’t have enough liquidityto function.
The Fed began adding liquiditybybuying banks’ subprime mortgages. In October, economists warned about the widespread use ofcollateralized debt obligationsand otherderivatives.
As the year drew to a close, the Bureau of Economic Analysis (BEA) revised its growth estimate higher. It said that the nation’s gross domestic producthad increased by0.5% in the third quarter. Its prior estimate said it had shrunk 0.5%. It seemed the U.S. economy could shrug off a housing downturn andbanks’ 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 2007GDP growthestimate down. It said growth was only 0.6%. 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 intraday low of 11,650.44 but seemed to recover. In fact, many thought the Bear Stearns rescue would avoid abear market.By May, the Dow rose above 13,000. It seemed the worst was over.
In July 2008, the crisis threatenedgovernment-sponsored agenciesFannie MaeandFreddie Mac. They required agovernment bailout. The Treasury Department guaranteed an estimated $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.
The month started with chilling news. On Monday, September 15, 2008, Lehman Brothers declared bankruptcy. The Dow dropped more than 200 points.
On Tuesday, September 16, 2008, the Fed announced it wasbailing out insurance giantAmerican International Group Inc. It madean $85 billion loan in return for 79.9% equity, effectively taking ownership. AIGhad run out of cash. It was scrambling to pay offcredit default swapsit had issued against now-failingmortgage-backed securities (MBS).
In the days following Lehman's collapse, money market funds lost $196 billion. That's where most businesses park their overnight cash. Companieshad panicked, switching to even safer Treasury notes.They did this becauseLiborrates werehigh. Banks had driven up rates because they were afraid to lend to each other. On September 17, 2008, the Dow fell 449.36 points.
On Thursday, September 18, 2008, markets rebounded by more than 400 points. Investors learned about a new bank bailout package.
On Friday, September 19, 2008, the Dow ended the week at 11,388.44. It was only slightly below its Monday open of 11,416.37. The Fed established theAsset-BackedCommercial Paper Money Market Mutual Fund Liquidity Facility. It lent money to banks to buy commercial paper from money market funds. The Fed's announcement confirmed that credit markets were partially frozen and in panic mode.
On Saturday, September 20, 2008, Secretary Henry Paulson and Federal Reserve ChairBen Bernankesent thebank bailout billto Congress. The Dow bounced around 11,000 until September 29, 2008, when the Senate voted againstthe bailout bill. The Dow lost 777.68 points during intraday trading.Global markets also panicked:
- Brazil's Ibovespa stock exchange was halted after dropping 10%
- The London FTSE dropped 5.3%
- Gold nearly reached $900 an ounce
- Oil dropped to $95 a barrel
To restore financial stability, theFeddoubled its currency swaps with foreign central banks in Europe, England, and Japan to $620 billion. The governments of the world were forced to provide all the liquidity for frozen credit markets.
Congress finally passed the bailout bill in early October, but the damage had already been done. The Labor Department reported that the economy had lost a whopping 159,000 jobs in the prior month. On Monday, October 6, 2008, the Dow dropped by 800 points, closing below10,000 for the first time since 2004.
The Fedtried to prop up banks by lending $540 billion tomoney market funds. The funds needed the cash to meet a continuing barrage of redemptions. Since August, about $500 billion had been withdrawn from prime money markets.
JPMorgan Chase managed the Fed's Money Market Investor Funding Facility (MMIFF). It purchased up to $600 billion of certificates of deposit, banknotes,and commercial paper that would come due in 90 days. The remaining $60 billion came from the money markets themselves. But they were also purchasing the commercial paper from the MMIFF.
TheFed quicklylowered the fed funds rate to just 1%. But the Libor bank lending rate stayed at a high of 2.58%. The Fedalsocoordinated a global central bank bailout.
The Dow responded by plummeting 15% throughout the month. By the end of October, the BEA released more sobering news. The economyhad contracted 0.3% in the third quarter. The nation was inrecession.
The month began with more bad news.TheLabor Departmentreported that the economy had lost a staggering 240,000 jobs in October. The AIG bailout grew to $150 billion. The Bush administration announced it was using part of the $700 billion bailouts to buypreferred stocksin the nations' banks.
TheBig Threeautomakers asked for a federal bailout.By November 20, 2008, the Dow had plummeted to 7,552.29, a new low. But the stock market crash of 2008 was not over yet.
TheFeddropped thefed fundsrate to 0%, its lowest level in history. The Dow ended the year at a sickening 8,776.39, down almost34% for the year.
On January 2, 2009, the Dowclimbed to 9,034.69. Investors believed the newObama administrationcould tackle the recession with its team of economic advisers. But the bad economic news continued. On March 5, 2009, the Dow plummeted to its bottom of6,594.44.
Soon afterward, President BarackObama's economic stimulus planinstilled the confidence needed to stop the panic. On July 24, 2009, the Dow reached a higher plane. It closed at 9,093.24, beating its January high. For most,the stock marketcrash of 2008 was over.
Investors bore the emotional scars from the crash for the next four years. On June 1, 2012, they panicked over a poor Mayjobs reportand theeurozone debt crisis. The Dow dropped 275 points. The 10-year benchmarkTreasury yielddropped to 1.47. This yield was the lowest rate in more than 200 years. It signaled that the confidence that evaporatedduring 2008 had not quite returned toWall Street.
In 2013, the stock market finally recovered. Stock prices rose faster than earnings, creating anasset bubble. The Dow continued setting higher records until February 2018. Fears of inflation and higher interest rates sent the Dow into the longest correction since 1961. Like many otherpast stock market crashes, it did not lead to a recession.
The correction ended in August 2018, and the Dow ended 2018 at 23,327.46. In 2019, it set a record of 27,359.16 in July. It then began declining due to concerns abouttrade warsinitiated byPresident Donald Trump.
When Did the Stock Market Crash in 2008?
The market decline that included the 2008 crash began a year earlier in October 2007. From those October 2007 highs, the market spent nearly a year slowly declining, and then a stock crash hit on September 29, 2008. Those losses extended over the next few months until they bottomed out in March 2009.
How Long Did It Take to Recover From the 2008 Stock Crash?
It took roughly five years for stocks to recover from the market decline that included the 2008 crash. The Dow Jones Industrial Average recovered to its October 2007 highs in March 2013.
Can the Stock Market Crash Again?
Of course. Stock markets are a reflection of the state of the economy and people's expectations about future growth and prosperity. If extreme events like a disaster, war, or pandemic occur, they can cause people to panic sell and cause a crash. A severe economic downturn can do the same. As a result, crashes are a regular part of the markets, although infrequent.
The Bottom Line
The stock market crash of 2008 was a result of defaults on consolidated mortgage-backed securities. Subprime housing loans comprised most MBS. Banks offered these loans to almost everyone, even those who weren’t creditworthy.
When the housing market fell, many homeowners defaulted on their loans. These defaults resounded all over the financial industry, which heavily invested in MBS. Consequently, companies doing business with these banks were negatively affected, and this pummeled their stocks, in turn.
The scale of the banking crisis led to a failure of confidence in the U.S. stock market as well. As a side effect, the stock market crashed in the fall of 2008.
The U.S. stock market did not sufficiently recover until mid-2013.