The plunge of 2/1/17

The plunge of 2/1/17

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 the

neat description.

On February 1st, 1917, the Dow Jones took a 7.2% hit (or a cool

78o Dow points in today”s market.as of 9/2). But to

understand what happened that day we need to look back at the

origins of World War I (very briefly). Someday, maybe we will

cover the war in far greater detail.

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 July 31st 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 July 31st, the first time our markets

had done that since the Panic of 1873. Wall Street didn”t reopen

until 12/12/14. In his book “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 shut

down was announced. [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.”

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 of 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.

On January 22, 1917 the Dow stood at 96.60. President 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 the “silent

mass of mankind everywhere” a vision of a new world. He

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 January 31

(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 merchantship. 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.

He risked war 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 Feb. 1, 1917, 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 Feb. 2nd, then began to rebound,

slowly. On Feb. 3rd, 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

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. [Wilson was screwed up].

During the three days, March 16-18, more ships were sunk, one

with the loss of 15 Americans. Wilson wanted to be the

peacemaker, not war monger. Now he had no choice.

On April 2nd (Dow 97.06), 1917, he 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).

[Additional Sources: The Wall Street Journal / John Dorfman.

“The American Century,” by Harold Evans].

Brian Trumbore