The Korean War and the Market, Part I

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.