As Congress debates more coronavirus stimulus, don’t exaggerate the effect of the 2008 bailouts on the stock market

CHAPEL HILL, N.C — The $2 trillion stimulus bill to fight the ills of the coronavirus that appears close to passage brings to mind the outwardly similar government bailout in the autumn of 2008.

You may think this parallel is good news for the stock market, since the 2008 stimulus appeared to work. After all, the bear market came to an end, didn’t it? And equities then entered into an extraordinary and unprecedented bull market that didn’t end until a month ago — 11 years later.

Well, sort of.

Actually, this cheerful narrative glosses over some harsh realities. The bear market in 2008 not only continued following the passage of the 2008 stimulus programs, it became even more ferocious. It lasted more than five additional months and roughly halved the S&P 500 index SPX, +1.15% over its life.

Let’s start this walk down memory lane in September 2008. Stocks had already been falling, but that’s when the housing market in particular and the economy in general collapsed. In that month alone, Lehman Brothers declared bankruptcy and the federal government effectively nationalized Fannie Mae and Freddie Mac, the two agencies whose goals were guaranteeing home mortgages. The Federal Reserve’s balance sheet mushroomed as it aggressively pursued a quantitative easing program.

This was followed in early October by passage of the Troubled Asset Relief Program (TARP), the massive stimulus program that directed the U.S. Treasury to purchase assets and equity of banks and other businesses.

The wisdom of all those actions is still hotly debated today. But about one thing there can be no doubt: They did not stop the bear market in its tracks, as you can see in this chart.

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