Two Years Removed from Lows, the Stock Market Thrives
Stocks have come a long way since spiraling credit markets ignited a sharp downturn three years ago.
The Dow Jones Industrial Average has climbed 87% -- breaking past the 12,000 threshold -- since its bear-market bottom in March 9, 2009, and the broader S&P 500 has rebounded by 95%.
All 30 Dow components are up, with Caterpillar (NYSE:CAT) and American Express (NYSE:AMX) both gaining more than 300%.
Many financial companies that were particularly affected by tumult in credit markets have also soared. Bank of America (NYSE:BAC) has rebounded 294% and JPMorgan Chase (NYSE:JPM) has jumped 195%. Car manufacturers have also swung back from the brink of failure, with Ford Motor (NYSE:F), for instance, climbing 732% since March.
During 2008 and 2009 the situation was dire, and such a broad rally seemed improbable at best.
The Fed has embarked on an extremely accommodative monetary policy regime since that point. The central bank has kept short term interest rates near 0% and bought trillions of dollars worth of treasury bonds and mortgage-backed securities in a bid to accelerate anemic economic growth and shore up turbulent credit markets.
As the housing market began crumbling in mid-2008, the value of assets backed by mortgages began plunging. The balance sheets of many major financial institutions that relied on these supposedly low-risk assets buckled shortly thereafter.
Bear Stearns was the first major investment bank to succumb, nearly collapsing in March 2008, before the New York Federal Reserve brokered a deal wherein JPMorgan bought the beleaguered firm with the help of a $30 billion loan from the Federal Reserve.
Lehman Brothers -- formerly one of the world's biggest investment banks, and a major player in the debt markets -- fared worse, failing in September 2008, sending shockwaves through the debt and equities markets. Merrill Lynch, another investment-banking-giant nearly caved in as well, before the Bank of America (NYSE:BAC) agreed to purchase the ailing company.
Traders raced out of equities markets and into safe assets, triggering a broad, sustained selloff. The VIX, considered a gauge of volatility in equities markets, skyrocketed to record highs. Lending slowed to a halt, making it difficult for companies outside the financial sector to finance ongoing and new ventures.
Major market averages hit their lowest level in early March of 2009, on fears some of the nation's biggest banks would become insolvent as crumbling credit markets quashed mortgage and consumer loan portfolios. The U.S. government had already swooped in, injecting $300 billion of capital into financial institutions, and backstopping billions in so-called toxic assets, but investors remained cautious.
Indeed, on March 6, shares of banking-giant Citigroup (NYSE:C) slid below the $1 a share mark, a move that seemed impossible mere months earlier.