The Relentless Grind: From Lehman’s Rubble to the Devil’s Low

The previous episode ended on October 31, 2008, with the S&P 500 at 968.75. What followed was not another panic — the system was already broken. What followed was the slow, grinding realization that the damage was far worse than anyone had imagined, and that recovery would take years, not months.

Between November 2008 and April 2009, the S&P 500 suffered thirteen more days with declines of −4% or worse. That is more crash days than the previous episode’s eight, and yet the overall decline was “only” 30% — because each crash day started from a lower base. The mathematics of compounding losses is cruel: a 5% decline from 1,200 erases 60 points. A 5% decline from 700 erases only 35. The crashes were getting less damaging in absolute terms even as they were pushing the index into territory not seen since 1996.

November 2008 was the densest single month for crash days in the entire 2007–09 bear market: six days with declines of −4% or worse in just 19 trading sessions. The month began with the election of Barack Obama on November 4 — which produced a +4.08% rally — and promptly collapsed.

November 5 — down 5.27%. The post-election rally lasted exactly one day. Of 3,059 stocks tracked, 2,407 declined (78.7%), with a median return of −4.24%. The Obama trade had been a mirage.

November 6 — down 5.03%. Back-to-back crashes, with the index falling from 952.77 to 904.88. Two consecutive −5% days had not occurred since the Great Depression. The median stock fell 3.94%, with 2,412 of 3,065 declining (78.7%).

November 12 — down 5.19%. Treasury Secretary Paulson stunned markets by announcing that TARP funds would not be used to buy toxic mortgage-backed securities — the original purpose of the program. Instead, the money would be injected directly into banks as capital. Markets interpreted this as an admission that the original plan was inadequate. Of 3,074 stocks, 2,671 declined (86.9%), with a median return of −5.05%.

November 14 — down 4.17%. The third crash in a week. The S&P fell from 911.29 to 873.29 as corporate earnings forecasts were slashed across every sector. The median stock fell 4.19%.

November 19 — down 6.12%. The S&P fell to 806.58, its lowest level since March 2003. Citigroup’s stock plunged to $4.71 — down 89% from its 2007 high. The broader market was now openly pricing in a depression scenario. Of 3,077 stocks tracked, 2,641 declined (85.8%), with a devastating median return of −6.04%.

November 20 — down 6.71%. The S&P 500 fell to 752.44 — a level not seen since 1997. This was the sixth crash day of the month. Lincoln National fell 30.56%. Flex Ltd fell 29.52%. Citigroup fell another 26.41%. Las Vegas Sands fell 23.22% to $2.48. The breadth was brutal: 2,615 of 3,077 stocks declined (85.0%), with a median return of −6.22%.

The government responded with a massive intervention: on November 23, the Treasury, Fed, and FDIC announced a rescue package for Citigroup, guaranteeing $306 billion of the bank’s troubled assets. The market rallied for the rest of the month, closing November at 896.24 — still down 7.5% for the month.

December 1, 2008 — down 8.93%. The National Bureau of Economic Research officially declared that the United States had been in recession since December 2007 — an acknowledgement that was twelve months late but nonetheless sent shockwaves through the market. The S&P 500 fell from 896.24 to 816.21 in a single session, erasing the entire late-November relief rally in one day.

Pilgrim’s Pride fell 45.77% — it would file for bankruptcy within days. Builders FirstSource fell 29.06% to $0.83. CBRE Group fell 29.39%. Louisiana-Pacific fell 28.43%. The breadth was catastrophic: 2,614 of 3,087 stocks declined (84.7%), with a median return of −8.10% and an average of −7.99%. The median stock fell harder than the S&P 500 itself.

The market entered 2009 with a brief rally — January 2 saw a +3.16% gain — but the respite was short-lived.

January 20 — down 5.28%. Barack Obama was inaugurated as the 44th President of the United States. The market’s verdict was swift and merciless: the S&P fell from 850.12 to 805.22 as investors concluded that the incoming administration’s economic team faced a crisis beyond the scope of any policy response. Of 3,095 stocks, 2,595 declined (83.8%), with a median return of −5.19%.

February 10 — down 4.91%. Treasury Secretary Timothy Geithner unveiled his bank rescue plan — the Financial Stability Plan — and markets were underwhelmed. The plan was long on goals and short on specifics. The S&P fell from 869.89 to 827.16. Of 3,103 stocks, 2,530 declined (81.6%), with a median of −3.87%.

February 17 — down 4.56%. Despite Congress having passed the $787 billion American Recovery and Reinvestment Act on February 13, markets continued to slide. Stimulus was coming, but not fast enough to arrest the economic freefall: the economy had lost 3.6 million jobs since the recession began. The S&P fell from 826.84 to 789.17. Of 3,104 stocks, 2,567 declined (82.7%), with a median return of −4.14%.

By early March 2009, the S&P 500 had fallen below 700 — a level it had not seen since 1996. Citigroup was trading below $1. Bank of America was near $3. The 401(k) retirement plans of an entire generation had been cut in half. And two more crash days arrived, right at the bottom.

March 2 — down 4.66%. The S&P fell from 735.09 to 700.82 as AIG reported a $61.7 billion quarterly loss — the largest in American corporate history — and received its fourth government rescue. Citigroup fell another 19.95%, now trading at $8.91 (split-adjusted). Of 3,109 stocks, 2,659 declined (85.5%), with a median return of −5.14%.

March 5 — down 4.25%. The S&P fell from 712.87 to 682.55. Four days later, on March 9, the index would touch its absolute closing low of 676.53. The intraday low — 666.79 — would become the stuff of Wall Street legend. (Traders, who are superstitious creatures, noted the “devil’s number” with dark humor.) Of 3,111 stocks, 2,553 declined (82.1%), with a median return of −4.39%.

Then something changed. On March 10, the S&P rallied 6.37%. On March 12, it rallied 4.07%. On March 23, it surged 7.08%. The bear market was over. No one knew it at the time — there would be one final crash day on April 20 (−4.28%) — but the index never revisited the March 9 low. The greatest bull market in history had begun, though it would be months before anyone believed it.

Between Episodes 5 and 6, the S&P 500 suffered 21 crash days of −4% or worse in just seven months — September 2008 through April 2009. No other period in the index’s history produced that many crash days in so short a span. The total peak-to-trough decline was 56.8%, from 1,565.15 (October 9, 2007) to 676.53 (March 9, 2009). An investor who held $1 million in an S&P 500 index fund at the peak watched it fall to $432,000 at the trough.

What happened next is the subject of our companion series, The Greatest Rallies in Market History: from that 676.53 bottom, the S&P 500 would rise to 4,800 by the end of 2021 — a 609% gain that rewarded anyone who stayed invested through the darkest days.