Blog: Lessons from the March 2009 Bottom, 13 Years Later

Thirteen years ago this week, the market bottomed after experiencing many months of exceptional volatility and sizable declines in its stock prices.

Evidence that the financial system was on shaky grounds became evident almost exactly one year prior to its bottom when investment bank Bear Stearns required a bailout and rescue buyer in March 2008.

Six months later, the financial market was now in freefall.

Lehman Brothers filed for bankruptcy on September 15. That same day, the Bank of America announced plans to acquire Merrill Lynch. On September 16, the Federal Reserve bailed out AIG. On September 19, the Treasury Department took the unprecedent step to guarantee US money market funds. On October 3, the US Congress passed the $700 billion Troubled Asset Relief Program (after its second attempt). On November 25, the Federal Reserve announced plans to launch its first quantitative easing program to purchase mortgage-based securities and other debt. On December 16, the Federal Reserve cut rates to near zero percent.

These events transpired close together in September 2008 because confidence evaporated from the system. Not knowing whether the government would save the next ailing bank or which institution that might be, confidence disappeared. The financial system relies entirely on confidence to function properly. Without it, lending becomes scarce, liquidity dries up, and the entrepreneurial spirit fades.

Between the Lehman Brothers bankruptcy filing and the market bottom six months later, the S&P 500 contracted a remarkable 47%, falling from 1251 points on September 15, 2008, to 667 intraday on March 6, 2009.

Thirteen years later, much has been learned from this unforgettable experience.

First, crises like this breed populism. Since 2009, we have observed the birth of a tea party movement, Occupy Wall Street, and Trump. History is no different. Many academics agree that the Great Depression was a major contributor to the rise of the Nazi Party, which in 1932 became Germany’s largest party in parliament.

Second, there is less faith in institutions now than ever before. According to United Nations research, trust in national government has declined from 46% in 2008 to 36% a decade later. In Canada, 62% believe elected officials do not care what ordinary people think (not as high as the 71% in the US who adopt this view; topping the list is Greece at 84%, which experienced its own financial crisis last decade).

Third, a swift and timely response is needed during a time of crisis. When the COVID-19 pandemic started in early 2020, governments promptly offered stimulus and central banks coordinated their response much faster than during the financial crisis. In 2008, Bear Stearns collapsed in March, yet no action was taken to prevent the catastrophe that unfolded the subsequent September. Despite the events in September 2008, the Federal Reserve did not slash rates to near zero until December 16.

Fourth, there is now an implicit guarantee that the government will intervene when necessary to avert a crisis. This precedent was set by the panic that unfolded after Lehman Brothers was allowed to fail and declare bankruptcy.

Unfortunately, many don’t realize they’re experiencing a crisis until it’s well underway. Few successfully avoid one. Investors that profited in 2008 betting against the market haven’t made many notable calls since, and many of those people have stayed bearish all throughout the last 13 years. However, we can surely learn from the past and apply the lessons learned to help avert a future disaster.