08/15/2008
World War I and the Market
[Next WSH...Friday, Aug. 29]
**Bull/Bear reading, 8/27...39.3/39.3...yes, a draw [Source: Chartcraft / Investors Intelligence]
Commenting on ABC’s “This Week” program last Sunday, George Will said of the sudden war between Russia and Georgia, and the fact few in the U.S. have ever heard of Georgia, let alone know of its strategic importance, “Back in 1914 no one had ever heard of Sarajevo.”
Thus far (though it’s a bit of a stretch), some are drawing parallels between the current conflict and the start of World War I, so I thought I’d reprise a piece I did about nine years ago on how Wall Street reacted to the war back then, including the plunge of Feb. 1, 1917.
When the U.S. goes to war the reaction in the financial markets is pretty standard. The markets reel on the initial news, particularly the “uncertainty” phase before actual military involvement, and then the markets settle down and sometimes rally. This is, of course, a broad generalization. But when you see analysts, both from the military and financial analysis side, what do you normally hear? Broad generalizations. World War I doesn’t exactly fit this neat description.
On 2/1/17, the Dow Jones took a 7.2% hit (or a cool 800+ Dow points in today’s market terms). But to understand what happened that day we need to look back at the origins of World War I in terms of U.S. involvement.
When Austrian Archduke Ferdinand was shot in Sarajevo, 6/28/14, the Dow Jones stood at 80 (6/27 close). Investors worldwide almost immediately turned bearish, particularly in Europe, for their participation in some sort of wide conflict seemed inevitable. From the period 7/25-7/30, almost all markets in Europe closed for a lengthy spell. London’s stock exchange closed on 7/31/14 and stayed that way until 1/4/15. The U.S. declared its intention to stay out of the imminent war and Wall Street was also closed on 7/31, the first time our markets had done so since the Panic of 1873, and didn’t reopen until 12/12/14. In his tome “The Bear Book,” author John Rothchild makes the observation that “Officials figured if nervous investors had no place to sell their stocks, a bear market couldn’t happen. In fact, a bear was already in progress when the shutdown was announced. [Ed. The Dow had dropped from 80.11 on 6/27 to 71.42 by 7/30]. A flea market for stocks called the ‘gutter market’ sprang up outside the exchange and prices fell some more.”
[Note: When the market reopened on 12/12/14, the value you will see in most articles (actually, you won’t see it anywhere but here) will be listed as 54.62. Fast forwarding, in September 1916 the Dow expanded from 12 to 20 issues and those new issues were computed back to the reopening of the Exchange on 12/12/14. The “old” figure for the 12 stocks was around 74. Old and new figures were calculated for the period up to the expansion of the Dow in 1916. Sorry to confuse you but just wanted to be totally accurate.]
On 1/22/17 the Dow stood at 96.60. President Woodrow Wilson had been secretly negotiating with Britain and Germany for the purposes of obtaining their permission for him to mediate. As part of this campaign he went before the Senate to give his “silent mass of mankind everywhere” vision for a new world. Wilson outlined a just peace that the American people would help to maintain through a league of nations. It would include the freedom of the seas, among other things.
But the Kaiser, Wilhelm II, had different ideas. On 1/31/17 (Dow 95.43), Germany gave 8 hours notice of its intent to sink any ships in the war zone around the British Isles, belligerent or neutral, warship or merchant ship. Up until then Germany had refrained from attacking neutral ships with its feared U-boats. America was permitted just one passenger vessel each week to England. The Kaiser knew this would mean war with America and risked it because his admirals had guaranteed that England would be on her knees within six months - before an ill-prepared America could help Europe in any real way.
The Wall Street Journal of 2/1/17 carried a headline, “Germany Withdraws All U-Boat Warfare Pledges.” The Dow Jones dropped to 88.52, a 7.2% decline. The following day’s Journal brought the news that Germany’s action had caused a “severe break” in the stock market. “Nothing counted in the price movement but the German note announcing an unrestricted submarine campaign,” the Journal reported. “Values went for nothing as thinly margined securities were wiped out and alarmed holders of stocks sought to save what they could from the wreckage.”
Prices declined a bit more on 2/2/17, then began to rebound, slowly. On 2/3, Wilson cut off diplomatic relations, but he insisted that only destruction of American ships and American lives would lead to war. That same day the American cargo ship Housatonic was sunk. Over the next 4 weeks other American vessels were lost. Wilson armed the merchant ships but he still felt a draw between the Allies and Germany was the most just conclusion. [Not quite.]
But during the period 3/16-3/18, more ships were sunk; one with the loss of 15 Americans. Wilson wanted to be peacemaker, not warmonger. Now he had no choice.
On 4/2/17 (Dow 97.06), Wilson gave his “The world must be made safe for democracy” speech. An ill-prepared America was now at war. On 6/9/17, the Dow peaked at 99.08. By 11/8/17, the Dow had slumped 31% to 68.58. American units did not take offensive action until 5/28/18 (Dow 78.42). The first day the market was open after the war ended on 11/11/18, 11/12, the Dow Jones closed at 86.56, actually down a bit from the previous close.
Additional sources: The Wall Street Journal / John Dorfman; “The American Century,” by Harold Evans
Wall Street History returns Aug. 29.
Brian Trumbore
