Over the first three quarters of 2008, one of the broad measures of global stock market performance, the MSCI World ($USD), was down 25.5%. This is an indicator that many investors worldwide have temporarily lost confidence in stocks.

Why?

The short answer is that there is less credit available for companies to expand and for consumers to spend.

And why is that? Here’s a brief summary of contributing events:

1. 1998-2001: The tech bubble
2. 2001-2003: The Fed to the rescue!
3. 2002-2006: The real estate bubble
4. 2006-2008: Real estate correction hits vulnerable borrowers
5. 2001-2007: The packaging and selling of mortgage debt extends the reach of real estate correction to global credit markets
6. 2008: Government and agency intervention

 

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1. 1998-2001: The tech bubble

With the collapse of the tech-telecom bubble, well represented by the NASDAQ index, the new era on Wall Street came to an end. After reaching its peak on March 10, 2000 at 5132, the index fell dramatically over the next two years, bottoming at 1113 in October 2002. On September 11, 2001, the terrorist attacks on the World Trade Center and the Pentagon shook the confidence of Americans.

 

2. 2001-2003: The Fed to the rescue!

In order to spur economic activity in the wake of the tech-telecom bubble burst (and later, 9/11), the US Federal Reserve lowered the Fed Funds Rate 11 times in 2001, from 6.5% to 1.75%. The Fed further cut rates, once in 2002 and once more in 2003, bringing the rate down to 1%.