Stock market downturn of 2002
Encyclopedia
The stock market downturn of 2002 (some say "stock market crash
" or "the Internet bubble bursting") is the sharp drop in stock prices during 2002 in stock exchange
s across the United States
, Canada
, Asia
, and Europe
. After recovering from lows reached following the September 11 attacks, indices
slid steadily starting in March 2002, with dramatic declines in July and September leading to lows last reached in 1997 and 1998. The dollar
declined steadily against the euro
, reaching a 1-to-1 valuation not seen since the euro's introduction.
is a prime example. Many internet companies (Webvan
, Exodus Communications
, and Pets.com
) went bankrupt. Others (Amazon.com
, eBay
, and Yahoo!
) went down dramatically in value, but remain in business to this day and have generally good long-term growth prospects. An outbreak of accounting scandals
, (Arthur Andersen
, Adelphia, Enron
,and WorldCom) was also a factor in the speed of the fall, as numerous large corporations were forced to restate earnings (or lack thereof) and investor confidence suffered. The September 11 attacks also contributed heavily to the stock market downturn, as investors became unsure about the prospect of terrorism
affecting the United States economy
.
The International Monetary Fund
had expressed concern about instability
in United States stock markets in the months leading up to the sharp downturn. The technology-heavy NASDAQ
stock market peaked on March 10, 2000, hitting an intra-day high of 5,132.52 and closing at 5,048.62. The Dow Jones Industrial Average
, a price-weighted average (adjusted for splits and dividends) of 30 large companies on the New York Stock Exchange
, peaked on January 14, 2000 with an intra-day high of 11,750.28 and a closing price of 11,722.98. In 2001, the DJIA was largely unchanged overall but had reached a secondary peak of 11,337.92 (11,350.05 intra-day) on May 21.
The downturn may be viewed as a reversion to average stock market performance in a longer-term context. From 1987 to 1995, the Dow rose each year by about 10%, but from 1995 to 2000, the Dow rose 15% a year. While the bear market began in 2000, by July and August 2002, the index had only dropped to the same level it would have achieved if the 10% annual growth rate followed during 1987-1995 had continued up to 2002.
fell below its July 23 low. However, the markets rose sharply over the rest of the week, and eventually surpassed Dow 9000 during several trading sessions in late August. After that, the Dow dropped to a four-year low on September 24, 2002, while the NASDAQ reached a 6-year low. The markets continued their declines, breaking the September low to five-year lows on October 7 and reaching a bottom (below Dow 7200 and just above 1100 on the NASDAQ) on October 9. Stocks recovered slightly from their October lows to year-end, with the Dow remaining in the mid-8000s from November 2002 to mid-January 2003. The markets reached a final low below Dow 7500 in mid-March 2003.
-listed companies stood at $5.4 trillion, for a total market value of $18.3 trillion. The NASDAQ subsequently lost nearly 80% and the S&P 500
lost 50% to reach the October 2002 lows. The total market value of NYSE (7.2) and NASDAQ (1.8) companies at that time was only $9 trillion, for an overall market loss of $9.3 trillion.
To put the downturn of 2002 in perspective, here is a look at annual U.S. stock market declines in 2000, 2001, and 2002:
Here is a historical view of the stock market downturn of 2002 including figures from the stock market bubble
of the late 1990s:
Stock market crash
A stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a stock market, resulting in a significant loss of paper wealth. Crashes are driven by panic as much as by underlying economic factors...
" or "the Internet bubble bursting") is the sharp drop in stock prices during 2002 in stock exchange
Stock exchange
A stock exchange is an entity that provides services for stock brokers and traders to trade stocks, bonds, and other securities. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments, and capital events including the payment of income and...
s across the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, Canada
Canada
Canada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends from the Atlantic Ocean in the east to the Pacific Ocean in the west, and northward into the Arctic Ocean...
, Asia
Asia
Asia is the world's largest and most populous continent, located primarily in the eastern and northern hemispheres. It covers 8.7% of the Earth's total surface area and with approximately 3.879 billion people, it hosts 60% of the world's current human population...
, and Europe
Europe
Europe is, by convention, one of the world's seven continents. Comprising the westernmost peninsula of Eurasia, Europe is generally 'divided' from Asia to its east by the watershed divides of the Ural and Caucasus Mountains, the Ural River, the Caspian and Black Seas, and the waterways connecting...
. After recovering from lows reached following the September 11 attacks, indices
Stock market index
A stock market index is a method of measuring a section of the stock market. Many indices are cited by news or financial services firms and are used as benchmarks, to measure the performance of portfolios such as mutual funds....
slid steadily starting in March 2002, with dramatic declines in July and September leading to lows last reached in 1997 and 1998. The dollar
Dollar
The dollar is the name of the official currency of many countries, including Australia, Belize, Canada, Ecuador, El Salvador, Hong Kong, New Zealand, Singapore, Taiwan, and the United States.-Etymology:...
declined steadily against the euro
Euro
The euro is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by the Institutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,...
, reaching a 1-to-1 valuation not seen since the euro's introduction.
Context
This downturn can be viewed as part of a larger bear market or correction that began in 2000, according to a report by the Cleveland Federal Reserve: Cleveland Fed http://www.clevelandfed.org/research/commentary/2001/0115.pdf, --Riverwildcat (talk) 13:56, 13 November 2011 (UTC) (UTC) after a decade-long bull market had led to unusually high stock valuations. The collapse of EnronEnron
Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. Before its bankruptcy on December 2, 2001, Enron employed approximately 22,000 staff and was one of the world's leading electricity, natural gas, communications, and pulp and paper companies, with...
is a prime example. Many internet companies (Webvan
Webvan
Webvan was an online "credit and delivery" grocery business that went bankrupt in 2001. It was headquartered in Foster City, California, USA, near Silicon Valley. It delivered products to customers' homes within a 30-minute window of their choosing. At its peak, it offered service in ten U.S...
, Exodus Communications
Exodus Communications
Exodus Communications was an Internet hosting service and Internet service provider to dot-com businesses. It went broke, along with many of its customers, during the bursting of the dot-com bubble. It declared Chapter 11 bankruptcy in 2001 and was purchased by Cable and Wireless in November...
, and Pets.com
Pets.com
Pets.com is a former dot-com enterprise that sold pet supplies to retail customers. It began operations in February 1999 and closed in November 2000. A high profile marketing campaign gave it a widely recognized public presence, including an appearance in the 1999 Macy's Thanksgiving Day Parade...
) went bankrupt. Others (Amazon.com
Amazon.com
Amazon.com, Inc. is a multinational electronic commerce company headquartered in Seattle, Washington, United States. It is the world's largest online retailer. Amazon has separate websites for the following countries: United States, Canada, United Kingdom, Germany, France, Italy, Spain, Japan, and...
, eBay
EBay
eBay Inc. is an American internet consumer-to-consumer corporation that manages eBay.com, an online auction and shopping website in which people and businesses buy and sell a broad variety of goods and services worldwide...
, and Yahoo!
Yahoo!
Yahoo! Inc. is an American multinational internet corporation headquartered in Sunnyvale, California, United States. The company is perhaps best known for its web portal, search engine , Yahoo! Directory, Yahoo! Mail, Yahoo! News, Yahoo! Groups, Yahoo! Answers, advertising, online mapping ,...
) went down dramatically in value, but remain in business to this day and have generally good long-term growth prospects. An outbreak of accounting scandals
Accounting scandals
Accounting scandals, or corporate accounting scandals, are political and business scandals which arise with the disclosure of misdeeds by trusted executives of large public corporations...
, (Arthur Andersen
Arthur Andersen
Arthur Andersen LLP, based in Chicago, was once one of the "Big Five" accounting firms among PricewaterhouseCoopers, Deloitte Touche Tohmatsu, Ernst & Young and KPMG, providing auditing, tax, and consulting services to large corporations...
, Adelphia, Enron
Enron
Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. Before its bankruptcy on December 2, 2001, Enron employed approximately 22,000 staff and was one of the world's leading electricity, natural gas, communications, and pulp and paper companies, with...
,and WorldCom) was also a factor in the speed of the fall, as numerous large corporations were forced to restate earnings (or lack thereof) and investor confidence suffered. The September 11 attacks also contributed heavily to the stock market downturn, as investors became unsure about the prospect of terrorism
Terrorism
Terrorism is the systematic use of terror, especially as a means of coercion. In the international community, however, terrorism has no universally agreed, legally binding, criminal law definition...
affecting the United States economy
Economy of the United States
The economy of the United States is the world's largest national economy. Its nominal GDP was estimated to be nearly $14.5 trillion in 2010, approximately a quarter of nominal global GDP. The European Union has a larger collective economy, but is not a single nation...
.
The International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
had expressed concern about instability
Economic stability
Economic stability refers to an absence of excessive fluctuations in the macroeconomy. An economy with fairly constant output growth and low and stable inflation would be considered economically stable. An economy with frequent large recessions, a pronounced business cycle, very high or variable...
in United States stock markets in the months leading up to the sharp downturn. The technology-heavy NASDAQ
NASDAQ
The NASDAQ Stock Market, also known as the NASDAQ, is an American stock exchange. "NASDAQ" originally stood for "National Association of Securities Dealers Automated Quotations". It is the second-largest stock exchange by market capitalization in the world, after the New York Stock Exchange. As of...
stock market peaked on March 10, 2000, hitting an intra-day high of 5,132.52 and closing at 5,048.62. The Dow Jones Industrial Average
Dow Jones Industrial Average
The Dow Jones Industrial Average , also called the Industrial Average, the Dow Jones, the Dow 30, or simply the Dow, is a stock market index, and one of several indices created by Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow...
, a price-weighted average (adjusted for splits and dividends) of 30 large companies on the New York Stock Exchange
New York Stock Exchange
The New York Stock Exchange is a stock exchange located at 11 Wall Street in Lower Manhattan, New York City, USA. It is by far the world's largest stock exchange by market capitalization of its listed companies at 13.39 trillion as of Dec 2010...
, peaked on January 14, 2000 with an intra-day high of 11,750.28 and a closing price of 11,722.98. In 2001, the DJIA was largely unchanged overall but had reached a secondary peak of 11,337.92 (11,350.05 intra-day) on May 21.
The downturn may be viewed as a reversion to average stock market performance in a longer-term context. From 1987 to 1995, the Dow rose each year by about 10%, but from 1995 to 2000, the Dow rose 15% a year. While the bear market began in 2000, by July and August 2002, the index had only dropped to the same level it would have achieved if the 10% annual growth rate followed during 1987-1995 had continued up to 2002.
Seeking a bottom
After falling for 11 of 12 consecutive days closing below Dow 8000 on July 23, 2002, the market rallied. The Dow rose 13% over the next four trading days, but then fell sharply again in early August. On August 5, the NASDAQNASDAQ
The NASDAQ Stock Market, also known as the NASDAQ, is an American stock exchange. "NASDAQ" originally stood for "National Association of Securities Dealers Automated Quotations". It is the second-largest stock exchange by market capitalization in the world, after the New York Stock Exchange. As of...
fell below its July 23 low. However, the markets rose sharply over the rest of the week, and eventually surpassed Dow 9000 during several trading sessions in late August. After that, the Dow dropped to a four-year low on September 24, 2002, while the NASDAQ reached a 6-year low. The markets continued their declines, breaking the September low to five-year lows on October 7 and reaching a bottom (below Dow 7200 and just above 1100 on the NASDAQ) on October 9. Stocks recovered slightly from their October lows to year-end, with the Dow remaining in the mid-8000s from November 2002 to mid-January 2003. The markets reached a final low below Dow 7500 in mid-March 2003.
Scale
As of September 24, 2002, the Dow Jones Industrial Average had lost 27% of the value it held on January 1, 2001: a total loss of 5 trillion dollars. The Dow Jones had already lost 9% of its peak value at the start of 2001, while the Nasdaq had lost 44%. At the March 2000 top, the sum in valuation of all NYSE-listed companies stood at $12.9 trillion, and the valuation sum of all NASDAQNASDAQ
The NASDAQ Stock Market, also known as the NASDAQ, is an American stock exchange. "NASDAQ" originally stood for "National Association of Securities Dealers Automated Quotations". It is the second-largest stock exchange by market capitalization in the world, after the New York Stock Exchange. As of...
-listed companies stood at $5.4 trillion, for a total market value of $18.3 trillion. The NASDAQ subsequently lost nearly 80% and the S&P 500
S&P 500
The S&P 500 is a free-float capitalization-weighted index published since 1957 of the prices of 500 large-cap common stocks actively traded in the United States. The stocks included in the S&P 500 are those of large publicly held companies that trade on either of the two largest American stock...
lost 50% to reach the October 2002 lows. The total market value of NYSE (7.2) and NASDAQ (1.8) companies at that time was only $9 trillion, for an overall market loss of $9.3 trillion.
Index levels
To put the downturn of 2002 in perspective, here is a look at annual U.S. stock market declines in 2000, 2001, and 2002:
- Nasdaq
- In 2000, the Nasdaq lost 39.28% of its value (4,069.31 to 2,470.52).
- In 2001, the Nasdaq lost 21.05% of its value (2,470.52 to 1,950.40).
- In 2002, the Nasdaq lost 31.53% of its value (1,950.40 to 1,335.51).
- Dow Jones Industrial Average
- In 2000, the Dow lost 6.17% of its value (11,497.10 to 10,788.00)
- In 2001, the Dow lost 5.35% of its value (10,788.00 to 10,021.60)
- In 2002, the Dow lost 16.76% of its value (10,021.60 to 8,341.63)
Here is a historical view of the stock market downturn of 2002 including figures from the stock market bubble
Stock market bubble
A stock market bubble is a type of economic bubble taking place in stock markets when market participants drive stock prices above their value in relation to some system of stock valuation....
of the late 1990s:
| Date | Nasdaq | % Chng.§ | Dow Jones | % Chng.§ | Notes |
|---|---|---|---|---|---|
| January 1, 1997 | 1,291.03 | — | 6,448.30 | — | |
| January 1, 1998 | 1,570.35 | +21.63% | 7,908.30 | +22.64% | |
| January 1, 1999 | 2,192.69 | +39.63% | 9,181.40 | +16.10% | |
| January 1, 2000 | 4,069.31 | +85.58% | 11,497.10 | +25.22% | |
| January 14, 2000 | 4,064.27 | −0.12% | 11,723.00 | +1.97% | The day the DJIA peaked. |
| March 10, 2000 | 5,048.62 | +24.22% | 9,928.80 | −15.31% | The day the Nasdaq peaked. |
| January 1, 2001 | 2,470.52 | −51.07% | 10,788.00 | +8.65% | |
| January 20, 2001 | 2,770.38 | +12.14% | 10,587.60 | −1.86% | President Bush takes office. |
| September 10, 2001 | 1,695.38 | −38.80% | 9,605.50 | −9.28% | Levels before September 11, 2001 attacks September 11, 2001 attacks The September 11 attacks The September 11 attacks The September 11 attacks (also referred to as September 11, September 11th or 9/119/11 is pronounced "nine eleven". The slash is not part of the pronunciation... . |
| September 21, 2001 | 1,423.19 | −16.05% | 8,235.80 | −14.26% | Lows after markets reopened. |
| January 1, 2002 | 1,950.40 | +37.04% | 10,021.60 | +21.68% | |
| October 9, 2002 | 1,114.11 | −42.88% | 7,286.27 | −27.29% | 2002 lows. |
| January 1, 2003 | 1,335.51 | +19.87% | 8,341.63 | +14.48% | |
| January 1, 2004 | 2,003.37 | +50.01% | 10,453.92 | +25.32% |
- §Values represent percent change from previous date listed in table.