Bear Stearns: A Lesson in Bear Market Bounces

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The tale of Bear Stearns’ rally and investors' myopic vision in the spring of 2008 is a valuable lesson for today.

On Sunday, March 16, 2008, Bear Stearns was bought by JP Morgan, with support and financial guarantees from the Fed, for $2 a share. It was quite the fall from $170 a year earlier.

Wall Street was in the early rounds of a bout with unprecedented financial instability, and the economy would soon follow. Investors were relieved Bear Stearns avoided bankruptcy in spite of the ominous environment and financial instability. Within hours of the market opening following the Bear Stearns takeover, stocks started rising and didn't look back for a month.

As shown below, the S&P 500 rallied nearly 15% for a month following the collapse of a significant 85-year-old investment bank. While the market didn't regain its October 2007 peak, animal spirits were rekindled for a brief while.