Wall Street History

---

Wall Street History

06/18/1999

The Korean War and the Market, Part I

Going forward, this link will mostly look at specific events and
periods of time (both from a domestic and foreign standpoint) to see
how Wall Street responded. As the Korean peninsula has been in the
news lately, and as we approach the 49th anniversary of the invasion
of South Korea by the North, I thought we''d take a look at the
market''s reaction to this event in 1950.

But first, some background to the confrontation. Two big events
occurred in 1949. The Soviet Union launched its first nuclear
device, scaring the hell out of us, and Mao Tse-Tung''s
Communist People''s Republic of China (PRC) was created as
Mao''s forces defeated the Nationalist Party of Chiang Kai-shek
in their civil war, with the Nationalists fleeing to Formosa
(Taiwan). The Cold War was in force and the U.S. had to
rethink its foreign and military policies.

America had let its conventional forces slip after World War II as
we didn''t perceive any real threats to our security with the world
in a devastated state and our own nuclear superiority being well
established. In Asia, the U.S. was focused on securing Japan and
the Philippines (and later South Korea and Taiwan) while the
U.S.S.R. aided Mao and his efforts with a mutual ally North
Korea.

Korea had been divided along the 38th parallel as a result of
WW II (August of ''45). It soon became clear that Stalin was
encouraging the North Koreans to use force to unify their
country.

These were scary, uncertain times. If I was writing my "Week in
Review" back then, believe me, I would have been 10 times
gloomier than I am today. You see, I expect everyone to watch
the news, get depressed, drink beer and eat lots of pizza, let alone
dump stocks. Of course, most of the time this would be horrible
advice, both for your financial and physical well-being.

Anyway the Dow Jones, which had performed well during the
period of our involvement in WW II, finished up 1949 at a level
of 200.13, up 14.3% on the year (not including dividends).

On June 1st, 1950, the Dow stood at 223.23. On June 23rd, the
Dow finished at 224.35. On June 25th North Korea invaded the
South and we were quickly brought back to reality. The markets
in the U.S. were closed June 24th and 25th and by the close of the
26th, the Dow had fallen 4.7% to finish at 213.91.

The U.N. Security Council as well as President Truman took
swift action. On June 27th the Security Council called on
members to "furnish such assistance to the Republic of Korea as
may be necessary to repel the armed attack and to restore
international peace and security to the area." Truman ordered
American air, naval, and ground forces into action. In all, some
14 other U.N. members sent in military units, the largest from
Britain and Turkey. [Long live Turkey!.we should remember
this the next time we think of treating them like dirt]. General
MacArthur was placed in charge of a unified command.

[The Korean War was officially called a "police action" as the
war was by order of Truman and the U.N. Security Council, not the
U.S. Congress].

For the first 3 months the war went poorly. Soviet pilots
(wearing Chinese uniforms and speaking Chinese over the radio
to mask their identity) battled American pilots over South Korea.
The U.N. force was pushed back to the tip of South Korea before
MacArthur''s brilliant maneuver at Inchon where he landed a
force in the North Korean rear and quickly pushed the North
back across the border.

Meanwhile, the Dow Jones bottomed on July 13th, 197.46, for a
decline of 12% in 3 weeks, certainly not insignificant. But,
while the war wasn''t going well, it was good for defense
contractors and railroad companies which helped lead the Dow
back to the levels of June 23rd by September. The Inchon
invasion of Sept. 15th had little impact on the markets and the
Dow Jones closed the month of September at 226.35, or a rally
back of 15% from the July 13th low.

Next week, more on this conflict and the action of the U.S.
equity market.

---