by Vedran Vuk
A while back, a free-market professor told me that FDR did in fact help the economy – with his death. I thought that this was just a joke, but I finally took the time to check it out. The results were startling.
FDR passed away on April 12, 1945. On the first trading day after his death, a strong upward trend began to form.
Even more startling is the Dow’s volume for the three days following his death:
Studying markets around major events is always an interesting exercise. For one thing, markets give us more honest interpretations of history without the propaganda. Markets measure the sentiments of investors with large sums of money on the line.
These investors don’t have the same comforts as political ideologues, historians, and armchair philosophers in interpreting events. They trade shares in the heat of the moment, and their fortunes critically depend on accurately predicting the significance of the news.
With this in mind, I examined other important WWII events in relation to the Dow. Some of the results run counter to the lessons most of us learned about WWII in school. The first one really threw me off, the invasion of Poland:
I wish that there were an easy way to explain this one, but it’s simply confounding. Poland was not so important to the U.S. But why would the invasion warrant a jump? On the other hand, the invasion of France was a dramatically negative event for the U.S. stock market:
Though the invasion of Poland resulted in a rally, the invasion of France led to a nearly 40-point drop. The Dow retreated almost 31% – the sharpest drop of the war. One would think that surely other events would be more dramatic, such as the attack on Pearl Harbor. However, the data tells a different story:
The Dow barely fell 7 points after the bombing. By the end of the month, the index almost rebounded to the pre-attack price. Strangely, the market wasn’t very surprised. Yet, most history books portray Pearl Harbor as the surprise attack of the century. Perhaps investors already accounted for the U.S.’s entrance into war after the invasion of France. To them, war was already a sure thing. Pearl Harbor was simply the final trigger point.
The victories have interesting reactions as well. For example, here’s D-Day:
The market doesn’t exactly jump on the landing day as one would expect. But this reaction is historically accurate.
D-Day gets a lot of the glory because of the logistical challenge. But the week following D-Day was probably more important. The Germans still had an opportunity to push the Allies off the beach. Thankfully, Hitler was convinced that D-Day was simply a diversion and left a large force of panzers idle. These panzers, as well as other dangers, were huge concerns post landing. Only a week after the event was the new front finally secure. Hence, the market reaction appears gradual as the troops pushed further away from the beach.
The most shocking chart is the reactions to the atomic bombs. What could be more surprising than dropping an atomic bomb? But the market didn’t even flinch.
Once again, the market movement doesn’t follow the official story: the bomb was a super-secret weapon, and it ended the war years earlier. The Dow didn’t seem to react that way. Perhaps victory had already been factored into the Dow. Maybe it was simply a delayed reaction, or maybe the official story isn’t true. Either way, it’s a head scratcher.
(Side note: the lowest-volume day of 1945 was on August 6, the date of the Hiroshima bomb.)
Not only do these charts suggest variant interpretations of these events, they also challenge the idea of war rescuing the economy.
If war boosts the economy, then explain the market dropping on the French invasion and Pearl Harbor. Further, shortly after the Japanese and German surrenders, the market rose. As victory appeared more certain after D-Day, the market also increased. The hope of peace creates prosperity, not war.
The charts share one interesting characteristic – a post-event drag. Notice that the event dates are followed by upward and downward trends. Today, a major event triggers a major sell-off or rally in the market immediately. Back then, the process appeared to be much slower.
I’ve read accounts from older traders who complain about the difficulty of profiting in modern markets. With these charts, maybe I can understand why. Looking back, one could easily make a profit on publicly available news. Today, the prices adjust in less than a minute to a news event.
Vedran Vuk [send him mail] has a bachelor degree of economics from Loyola University of New Orleans, and was a 2006 Summer Fellow at the Mises Institute. He is an analyst with Casey Research and lives and works in the D.C. area.
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