2008 was a historic year in the financial markets. The year unfolded in ways very few expected, with considerable strain on world financial systems leading to unprecedented government and central bank intervention and stimulus. All this resulted in the worst stock market performance since the Great Depression, extreme volatility and economic strain that will continue to impact the financial markets in the coming year. Although 2008 will go down as a year many want to forget, we wanted to provide a brief recap of the events that shaped the year, and put the performance of the markets in context.
The story is well known by now -- the financial crisis that began with the subprime mortgage collapse in 2007 evolved and escalated in 2008. The collapse of the subprime market spread to the rest of the mortgage market, resulting in the locking up of the asset backed securities markets and unprecedented spreads on credit derivatives. Increased delinquencies and defaults caused impaired asset values and a series of massive write-downs at financial institutions that bought and held these assets. The vicious cycle of declining asset values, balance sheet write-downs and diminishing liquidity in the markets that needed it most weighed heavily on the market.
Eventually, the balance sheet strains and risk (perceived or real) were too much for some companies and investors to withstand, leading to a crisis of confidence in financial institutions and a reshaping of the system they made up. In the end, several major institutions collapsed and a wave of others consolidated within the sector, most notably:
- Countrywide: On Jan. 11 it was announced that Countrywide Financial would be acquired by Bank Of America
- Bear Stearns: On March 17 Bear Stearns failed. The stock had been the subject of much speculation prior to its failure, and company management defended the company's standing until the end. The collapse of Bear led to a confidence crisis in other investment banks and financial institutions.
- IndyMac: On July 14 mortgage bank IndyMac was seized by federal regulators
- Fannie & Freddie: On Sept. 8 mortgage GSEs Fannie Mae and Freddie Mac were placed into a conservatorship, effectively wiping out the value of their equity
- Lehman, AIG & Merrill: On Sept. 15, Lehman Brothers filed for bankruptcy, AIG was bailed out by the government and Bank of America bought Merrill Lynch. Lehman represents the biggest bankruptcy in U.S. history.
- WaMu: On Sept. 25, JPMorgan bought the banking assets of Washington Mutual after the bank collapsed and was taken over by the FDIC. WaMu represents the biggest bank failure in history.
- Wachovia: On Sept. 29, it was announced that Citigroup would acquire Wachovia, although Wells Fargo eventually outbid Citigroup.
As financial institutions came under pressure, the rest of the market fell as a systemic deleveraging and valuation reset took place. While the financial sector was clearly the focal point of 2008, the bursting of the commodity bubble led to significant declines in commodity related groups as well. This is notable because commodities acted as a safe haven area in the early part of 2008, offering investors a temporary place to hide from the fallout in financials and the rest of the market.
Looking at the broader market, major equity averages are set to post the largest yearly decline since the Great Depression, with the major U.S. indices down 35-42%. Despite the drastic decline, it could have been worse, as the averages managed to rebound ~20% off yearly lows after dropping to nearly half of their value from the beginning of the year.
The international markets followed the U.S. lower with Russia (Micex -67%), China (Shanghai -65%) stacking up as the worst performers among major international averages. Given the worldwide market turmoil, volatility indices soared with sharp spikes reflecting investor panic/fear as the major averages experienced declines and wild swings not seen in years. The VIX hit historic highs based on its new calculation, but remained below comparable levels seen during the crash of '87 (based on its old calculation).
Things have quieted down in December, with an average daily swing in the Dow of ~300 points compared to ~430 points in November, and ~590 points in October. For the most part the latter portion of the year experienced whipsaw action with the largest quarterly point decline ever in the S&P and Dow, with the most pain being felt in September and October.
Treasuries represented one of the few areas that performed well in 2008, with the bonds rising sharply toward the end of the year, driving yields to historic lows. Click here for a more detailed overview of performance figures for the global markets.
Looking Ahead
Most are hoping for some stabilization in 2009, as the effects of the policies and actions put in place in 2008 begin to work their way into the system. The environment has a "back to basics" feel to it, with institutions and investors moving away from leverage and exotic derivatives, and looking into fundamentally sound assets in which to invest. There will be a new administration in the White House and more economic stimulus is expected, with the remainder of the TARP likely to be deployed alongside other stimulus packages. The economy will remain at the forefront of investor concerns, as it is widely expected to be a sluggish period. Other ongoing areas of concern include credit and liquidity conditions, the housing market, commercial real estate and consumer credit.
Briefing.com Note
Briefing.com worked tirelessly in 2008 to keep investors up to speed with market moving information and analysis, and the same will continue in 2009. Briefing.com subscribers will also have the opportunity to benefit from a new customizable suite of products intended to meet the diverse set of needs of our sophisticated subscriber base.
Global Indexes
| Region | Symbol | % Change |
| US | SPX | -38.7% |
| US | Nasdaq Comp | -40.8% |
| US | Dow | -33.9% |
| UK | FTSE 100 | -31.3% |
| France | CAC 40 | -42.7% |
| Germany | DAX | -46.3% |
| Japan | Nikkei | -42.1% |
| China | Hang Seng | -48.3% |
| China | Shanghai | -65.4% |
| Korea | Kospi | -40.7% |
| Russia | Micex | -67.2% |
| Brazil | Bovespa | -41.2% |
| Iceland | OMX Iceland 15 | -90.0% |
U.S. Major Averages
| Symbol | 2007 Close | Current | % Change | Point Change | Year Low | % Change to Low | % Change Off Lows | Year High | % Change to High | Range |
| SPX | 1468.36 | 879.03 | -40.1% | -589.33 | 741.02 | -49.5% | 18.6% | 1471.77 | 0.2% | 730.75 |
| Nas Comp | 2652.28 | 1530.93 | -42.3% | -1121.35 | 1295.48 | -51.2% | 18.2% | 2661.5 | 0.3% | 1366.02 |
| Dow | 13264.82 | 8584.92 | -35.3% | -4679.9 | 7449.38 | -43.8% | 15.2% | 13279.54 | 0.1% | 5830.16 |
| VIX | 22.5 | 43.51 | 93.4% | 21.01 | 15.82 | -29.7% | 175.0% | 89.53 | 297.9% | 73.71 |
| VXN | 25.9 | 43.53 | 68.1% | 17.63 | 19.75 | -23.7% | 120.4% | 86.52 | 234.1% | 66.77 |
| Oil | 95.98 | 38 | -60.4% | -57.98 | 33.87 | -64.7% | 12.2% | 145.29 | 51.4% | 111.42 |
U.S. Major Averages Quarterly Data
| Symbol | Q1 | Q2 | Q3 | Q4 | ||||
| Pt Change | % Change | Pt Change | % Change | Pt Change | % Change | Pt Change | % Change | |
| SPX | -145.66 | -9.9% | -42.70 | -3.2% | -115.26 | -9.0% | -298.01 | -25.6% |
| Nas Comp | -373.18 | -14.1% | 13.88 | 0.6% | -210.65 | -9.2% | -575.62 | -27.6% |
| Dow | -1001.93 | -7.6% | -912.88 | -7.4% | -499.35 | -4.4% | -2330.49 | -21.5% |
| VIX | 3.11 | 13.8% | -1.66 | -6.5% | 15.44 | 64.5% | 5.29 | 13.4% |
| VXN | 3.14 | 12.1% | 0.72 | 2.5% | 12.82 | 43.1% | 2.55 | 6.0% |
U.S. Major Averages Monthly Data
| % Change | Jan | Feb | Mar | Apr | May | Jun | Jly | Aug | Sep | Oct | Nov | Dec |
| SPX | -6.1% | -3.5% | -0.6% | 4.8% | 1.1% | -8.6% | -1.0% | 1.2% | -9.2% | -16.8% | -7.5% | -0.7% |
| Nas Comp | -9.9% | -5.0% | 0.3% | 5.9% | 4.6% | -9.1% | 1.4% | 1.8% | -12.0% | -17.4% | -10.8% | -1.9% |
| Dow | -4.6% | -3.0% | 0.0% | 4.5% | -1.4% | -10.2% | 0.2% | 1.5% | -6.0% | -14.1% | -5.3% | 0.8% |
| VIX | 16.4% | 1.3% | -3.5% | -18.8% | -14.2% | 34.3% | -4.2% | -10.0% | 90.8% | 52.0% | -7.7% | -19.2% |
| VXN | 20.0% | -8.5% | 2.1% | -17.5% | -12.9% | 42.7% | -11.8% | -8.5% | 77.3% | 41.6% | -7.0% | -19.5% |
