Markets: What does history tell us?

Market trends in the Dow Jones Industrial Average show that times of tragedy, crisis, or war are marked by initial stock market volatility. This is followed by a rally that can last for several months.

Consider these examples:

World War l:
On July 28, 1914, Austria-Hungary declared war on Russia, beginning World War l. The New York market responded by losing almost 7 per cent of its value in one day of trading. (That’s almost exactly the same percentage loss that the Dow Jones Industrial Average experienced on Monday when the U.S. markets reopened after the September 11th attacks.)

A day later, July 29, 1914, the stock markets closed, much like they did across the continent last week.  When the New York stock exchange finally re-opened three months later, it began a steady climb that saw the Dow Jones Average double by the time the Treaty of Versailles was signed in 1918.

World War ll:
Something similar happened during the Second World War. When America declared neutrality in 1939, the Dow Jones rallied 6 per cent from the previous day’s close. When Pearl Harbor was attacked, the stock market plummeted, dpping 6.5 per cent.

It continued to trend down through much of 1942, the darkest years of the war for the Allies. But then it began to climb, and by the time Japanese forces surrendered to the Allies in 1945 the Dow was more than 50 per cent higher than it had been on December 5, 1941, the last trading session before Pearl Harbor.

Korean War:
On the day after the Korean War broke out in 1950, the market dropped 12 per cent, a huge one-day setback. But in the subsequent six months, it rose 19.2 per cent, according to figures compiled by Ned Davis Research.

JFK’s death:
When John F. Kennedy was assassinated, the market fell almost 3 per cent, but six months later it was more than 15 per cent higher.

Nixon’s resignation:
Richard Nixon’s resignation prompted a sell-off of 15.5 per cent. But investors shook it off and pushed the Dow up by 12.5 per cent in the following six months.

Iraq invades Kuwait:
On the day following Iraq’s invasion of Kuwait in August 1990, the Dow initially plunged 120 points before recovering slightly. Stock prices continued to fall, reaching a low on October 11, nearly 20 per cent down from before the Iraqi invasion. 

Three months later, a worldwide rally greeted news that the U.S.-led coalition forces were dominating Operation Desert Storm. The Dow Jones soared 114 points, and soon broke through the 3000 mark.

Civil War battle:
Perhaps there is some significance to the fact that it was 139 years ago this week that Gen. Robert E. Lee and his Confederate troops fought the Union Army at Antietam. More than 26,000 soldiers from both sides were killed or wounded.

That battle led President Abraham Lincoln to issue the Emancipation Proclamation. American civil and business life were forever changed, and a new era was born for the freedom of people and markets.

Protect your wealth
That’s the historic pattern. When America faces crisis or goes to war, the economy gets caught up in the momentum and marches to new heights.  Yes, there is volatility. Yes,
stock markets go into free-fall at first. But there are things you can do to protect your wealth and even to build it.  

1. Don’t sell all of your stocks. Panic selling at this point will simply guarantee significant losses. You’re best to hold on tight and wait for the markets to start climbing again.

2. Take advantage of dropping interest rates. If you have a mortgage that is coming due soon, prepare to lock in for a longer term than normal. However, stay short term with maturing GICs, because rates at these low levels are unlikely to last. You don’t want to be locked in for five years with a return of 4 per cent or less.

3. Consider the industries that are likely to benefit from the chain of events set into motion by last weeks’ disaster. The technology sector may finally rally as corporations move away from centralized skyscrapers and towards telecommuting.  

Finally, consider your own ethics carefully.  Times of volatility will expose many opportunities to a small investor. Only you can decide how much, if any, of your profits should go to a charity or relief work.

Adapted from a CBC radio broadcast.