This week marks the 11th anniversary of the S&P 500’s SPX bottom during the global financial crisis (GFC), which seems like quite the coincidence as we currently find ourselves in the midst of one of the most volatile periods the equity market has ever experienced. Given the anniversary and the current state of the market, we thought it apropos to look back on the financial crisis and some of the lessons it taught us.
Depending on how you define “bottom”, the 11-year anniversary of the GFC bottom will either occur tomorrow – the S&P 500 hit its intraday low of 666.79 on March 6, 2009 – or will happen on Monday, as it had its lowest close of 676.53 on March 9, 2009. From its pre-crisis peak of 1565.15 on October 9, 2007, SPX fell nearly 57% to its March 9, 2009, close, decimating the savings of millions of households in the process. The ramifications of this crisis were exacerbated by the collapse of housing prices and the highest levels of domestic unemployment in nearly 30 years, which made the market turmoil we’ve experienced over the last two weeks seem downright pleasant.
Even though the current correction isn’t even in the same league as the GFC, in the midst of any large sell-off it feels as though it could be the “big one.” After all, if the catalyst for a market sell-off didn’t appear to be a credible potential crisis (at least to the majority), then the sell-off wouldn’t have materialized. It’s possible that the current correction could escalate and become a full-blown bear market, although the odds don’t favor it, and the recent market action has some features in common with several notable market bottoms. However, the possibility cannot be dismissed. But this is why it is critical to have a plan and to stick to it – we can never know for certain when a relatively routine correction will grow into a historic downturn – and otherwise, sound judgment can become clouded when waves are crashing over the bow. One of the lessons we learned from the financial crisis was that while it is important to have a plan for when to head for safety, it’s equally important that any plan includes provisions for reentering the water.
On the TODAY show on October 6, 2008, at which point the S&P 500 was already down more than 32% from its 2007 peak, Jim Cramer said “Whatever money you may need for the next five years, please take it out of the stock market right now, this week. I do not believe that you should risk those assets in the stock market right now.” While we have no way of knowing how many people followed Mr. Cramer’s advice, anecdotally, we know that many investors threw in the towel sometime during the financial crisis and some became so fearful that, to their own financial detriment, they never reentered the market.
With the benefit of hindsight, it’s easy to see the folly of such a decision. However, at that time, there was a very real feeling among many people that the sky was indeed falling. Depending on where you were in life during this period, you may or may not have an appreciation for the pervasive fear that existed from Main Street to Wall Street. There were a number of events surrounding the financial crisis that had never occurred and/or were believed to be “impossible” e.g., the fall of Lehman Brothers and the nationwide collapse of home prices, which led to speculation that the global economy could collapse.
Even after the US equity market had hit what we now know was its bottom in 2009, there was still no shortage of headlines that would have given all but the most steely, disciplined investors qualms about deploying capital into the market. On April 3, 2009, New York Times headline read, “663,000 Jobs Lost in March; Total Tops 5 Million.” Chrysler filed for bankruptcy on April 30th, followed by General Motors in early June. All of this to say, that even as the recovery of the US equity market was underway, there were still plenty of reasons to be skeptical that the worst was over.