This is our second piece in a three-part series on the 2008 Financial Crisis. For the first piece, please see “10 Years Later: 4 Universal Trading Lessons from the Great Recession.”
Under normal conditions, the stock market goes up and down. So corrections (aka losses) happen from time-to-time. They’re expected and not much of a challenge for our economy to navigate.
But 2008 was different. That year, markets were not operating normally. Because the economy was not operating normally. Here’s a breakdown at some of the moves in equities, commodities and currencies.
This is a continuation of our month-long series on how to get better trading every day. For complete access to this series, go to https://blog.topsteptrader.com/topic/september-trading-insights.
Commodities and currencies ascended to record highs only to later plummet to severe lows. Credit was tight and tension was high. All of this points to the lesson for today: markets can turn on a dime. Though trends are powerful forces, reversals are too. Don’t get lulled into a state of calm. Here’s why:
The S&P 500 ($ES) was moving in 2008. To this day, of the top 5 largest percentage declines in the S&P 500, there are four from 2008. That includes a one-day 9% decline on October 15, 2008, as well as a 8.9% decline on December 1, a 8.8% decline on September 29 and a 7.6% decline on October 9.
To put that in context, those were near 100-point moves in the price of the S&P. That’s a $5,000 move. On a one lot!
But it wasn’t just moves to the downside. Given how much the market was tied to the news, there were also some rips in price. In 2008, five of the top 10 largest one-day moves to the upside in the S&P 500 happened. On October 13, the S&P added 11.6%. The S&P gained another 10.8% increased on October 28. While after losing 7.6% on September 29, the price raillied 5.45 the next day.
The Crude Oil ($CL) markets experienced quite the pendulum swing in 2008 as well.
That summer, in the lead up to the worst crisis in a Century, the price of oil jumped to $147 per barrel. It may seem strange given that Oil demand would fall sharply as the unemployment rate would move higher, but the market at the time was focused on supply, not demand.
Oil workers in Brazil went on strike, limiting the amount of oil exported from the oil-independent country. Investors were also worried about increased threats to oil supply from Nigeria and Iran. At the time, experts expected less Crude Oil from Iran after the U.S. imposed sanctions on the country for its missile testing and a militant group in Nigeria had abandoned a temporary cease-fire to protest against British forces in the area.
But when Crude Oil prices got moving, the got moving. Though hitting a peak above $160 in June of 2008, the Oil price fell to near $50 per barrel by December, a 68% crash. The largest monthly decline came between September and October, when the price fell from $116 to $79 per barrel.
If you went to sleep between January 1, 2008 and December 31, 2008, you might think that the Gold ($GC) price didn’t change. That’s because the price of Gold opened and closed the year between $850 and $900 per ounce. But that only tells half the story.
Starting the year, like Crude Oil and other commodities, Gold prices were on a bull market tear. The price quickly gained from $850 to new nominal price highs around $1,000 per ounce in March. Then, with the collapse of Bear Stearns on March 16, the price started to crack, erasing all those gains for the year.
Prices attempted to rally back, but made a lower high before just unwinding between mid-July and November, when prices put in a low around $700. That’s a 30% peak-to-trough decline, or a loss of 18% since the start of the year. Like other markets, the swings in Gold were huge — to the tune of $50+ per contract within a day. It was volatility that wasn’t seen before… or since.
Euro and U.S. Dollar
If you know the correlation between Gold and the U.S. Dollar, you probably realize that if Gold was at an all-time high, then the Dollar would be at all-time lows. And that it was.
In early 2008, if you were day trading, you could buy the Euro ($6E) each morning and sell it in the afternoon for a profit. The relentless trend lower in the U.S. Dollar was palpable. All of this sent the Dollar Index to an all-time low near 70, and the EUR/USD to a high above 1.60.
This time also saw a huge trend in what is known as the “carry trade,” thanks to huge spreads in interest rates between economies.
However, as it became clear that the U.S. wasn’t the only economy facing hardships and that it wasn’t the only economy that would see asset prices decline, investors shifted their focus to the safe haven concept. That created a huge bid for U.S. Treasuries and the U.S. Dollars that you need to buy them.
In the fall, the dollar went “on [a] rampage of late, gaining 15.5 percent against a basket of currencies since Aug. 1,” a shift which occurred as the euro fell to a two-year low of $1.2843, The New York Times reported in October 2008.
Don’t remember the critical moments of the Great Recession? We have a play-by-play of the pivotal moments of the worst financial crisis since the Great Depression.