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Quote of the Day
““The only function of economic forecasting is to make astrology look respectable.”
— Ezra Solomon
Several of the events that occurred on this day are perfect evidence of the lack of accurate forecasting or foresight into major stock market events.
July 19th – This Day in Stock Market History
July 19, 2002: “The Crash of 2002”
On Friday, July 19, 2002, the Dow Jones Industrial Average fell 390.23 points, or about 4.6%, to close at 8,019.26 — its lowest level since October 1998, when Russia’s default and the Long-Term Capital Management collapse had rattled global markets.
The selloff on this day in 2002 was broad, and not a single one of the 30 Dow components rose that day. The S&P 500 shed roughly 34 points (3.9%) to 847.75, its lowest close since 1997, and the Nasdaq dropped to 1,319.05.
It was the Dow’s worst single session since the first day of trading after the September 11 attacks. Over ten trading days the Dow had shed roughly 1,360 points.
The proximate cause was a crisis of confidence. The dot-com bubble had burst in 2000, and by mid-2002 a cascade of accounting scandals from Enron, WorldCom, Adelphia, and Tyco had convinced investors that reported corporate earnings could not be trusted.
WorldCom had disclosed a $3.8 billion accounting fraud in June 2002 and WorldCom would file for bankruptcy two days later.
CNN’s contemporaneous coverage abandoned euphemism:
“Let’s start calling the ‘sell off’ what it is. Let’s call it a panic. Let’s call it a crash.”
Roughly $7.7 trillion in U.S. market capitalization had been erased since the March 2000 peak.
However, this “panic” was not the bottom. The Dow would soon make new bear-market lows below 7,300 on October 9, 2002, and the broader bear market did not truly end until March 2003.
Investors who capitulated on July 19 locked in losses near the worst possible moment; those who held or bought were rewarded over the following five years as the Dow rallied to a record above 14,000 by — fittingly — July 19, 2007
July 19, 2007 — The Dow Closes Above 14,000 for the first time
The Dow rose 82.19 points, or 0.59%, on July 19, 2007, closing at 14,000.41 for the first time and propelling the Dow to it’s thirty-second record close of the year.
The milestone was laced with irony. The very same day, Federal Reserve Chairman Ben Bernanke was back on Capitol Hill for his semiannual testimony, warning that problems among subprime mortgage holders were “likely to get worse before they get better.”
Within three months the Dow would peak at 14,164.53 on October 9, 2007 and then begin the worst bear market since the Great Depression, ultimately bottoming at 6,547.05 in March 9th, 2009 — a 54% collapse.
July 19, 2013: Detroit Files the Largest Municipal Bankruptcy in U.S. History
On the evening of Thursday, July 18, 2013, the City of Detroit filed for Chapter 9 bankruptcy protection in the U.S. Bankruptcy Court for the Eastern District of Michigan for its $18.5 billion in debt and liabilities. July 19, 2013 was the first trading day after the filing was made.
Emergency manager Kevyn Orr, appointed by Governor Rick Snyder, had been unable to persuade creditors to accept roughly ten cents on the dollar.
The spread between the S&P Michigan GO Index and the national GO index jumped by 29 basis points on the day, punishing all Michigan municipal bond holders.
The filing would go through the courts and eventually Judge Steven Rhodes found Detroit eligible for Chapter 9 on December 3, 2013.
Ultimately, Detroit municipal bond holders would reclaim some of their investment depending on the type of municipal bonds they owned.
Water/sewer bondholders would ultimately receive 100%, while General Obligation bondholders would receive between 30% and 70%, and general unsecured holders would receive 10-15%.
Pension holders took a 4.5% base cut and lost COLA entirely, while police & fire (PFRS) retirees took no base cut but had COLA cut from 2.25% to 1%.
Notably, the Dow had closed at a record 15,548.54 that same day — the equity market did not even blink.
Reads of the Day
WorldCom and the Rush to Legislate – SEC Historical Society
This account connects the July 19, 2002 market decline directly to the congressional negotiations that produced Sarbanes-Oxley legislation later that year. For those interested, it links to many more detailed articles on the Enron and WorldCom bankruptcies, and subsequent congressional action.
Boomerang: Travels in the New Third World – Michael Lewis
Lewis’s style of long-form journalism can make any topic thrilling. This book covers the 2008–2011 sovereign debt crisis, with chapters on Iceland, Greece, Ireland, and Germany, plus a closing U.S. chapter centered on California. It predates and does not mention Detroit’s bankruptcy filing, but it captures the pre-Detroit municipal-fiscal reckoning and is full of great lessons for bond investors today.
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