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How have wars affected stock markets?


The stock markets are places where assets are negotiated. Since its origin, in the Netherlands during the Renaissance, stocks, bonds, exchanges, derivatives and others are traded in these places. They attract investors that are seeking different ways of increasing their investment through the assets’ appreciation or participation in profits, given it’s stakes. Prices vary according to the demand of the asset in the market. So, as higher the demand goes, higher the prices will be. However, how investors react when a conflict threatens it’s possessions and future profits? In this analysis, great historical conflicts since the 18th century will be treated, emphasizing the ones of the 20th century, as these had huge worldwide consequences given how integrated the world had become in the centuries before. Let’s see a few examples of that.


France, during the 18th century, was an unstable nation, with economic and social crisis. The absolutist state suffered a great revolution, inspired by ilumnists thoughts, in 1789, that took down the power of aristocracy and gave it to the french bourgeoisie. For 10 years, the european country faced a violent time, having the guillotine as a symbol of that. Nonetheless, what can be said of the french stock market during that time?


The french bourse (stock market) was founded in 1724. There were negotiations before that year though, in a pretty active way. Although, in 1793, with the Paris market closure, trades were suspended and joint-stocks companies were banned from the country. One of the greatest (if not the greatest) companies listed on the french stock exchange, the French West India Company, had a high volume of trading stocks. With the banishment, the company’s officials tried to sell their assets (ships) to reduce their loss, by bribing the nations’ authorities. When they got uncovered, they were arrested and, later, executed.

What about the assets’ prices after the revolution? Along with the inflation and the currency devaluation that occured for 7 years past the beginning of the conflict, a massive devaluation of the french bonds made investors seek for safety in England (to invest in and also to live in). Besides, France declared a moratorium on its debts, warding off foreign investors. It was only in 1799, when Napoleon took power, that the stock market was reestablished, with the allowance of joint-stocks companies and solid bonds. These characteristics were kept during the entire 19th century until 1914 (we’ll see that later), making France one of the most important european financial hubs.


At the beginning of the 20th century, money traveled fast. Way much faster than the ships that crossed the oceans in the first decades of the previous century. At the century’s half, money took only a few minutes to travel through submarine wires. With the telegraph, buy and sell orders were transmitted thousands of miles away and, with the gold standard, trades with distinct currencies were facilitated, as it allowed flat currency rates among the countries that adopted it. Thus, the continuous capital flow between nations only increased in the forward years. That happened until 1914 and will see why.


After the assassination of Franz Ferdinand, the Austria-Hungary’s Archduke, Europe collapsed into war of great porpotions never seen before, involving it’s main nations. Their first act regarding the stock markets, was to shut them down, avoiding a massive foreing capital outflow. The New York Stock Exchange (NYSE) also kept shutdown for 6 months in that year. However, this closure didn’t forbid negotiations amongst investors, like the french one during the revolution. So, in that way, trades kept occurring, even though in a smaller volume, as the continent was facing bombings, chemical attacks and military invasions in it’s main nations. How did the market react when they got open again, (except for a few ones) at the end of the first year of war?


Some restrictions were set on negotiations of stocks and bonds after the reopening of the european markets. The first one was to establish a floor for the assets’ prices (the price of closure was the price of the opening, six months later). Not only that, there were restrictions on the capital flow, trying to avoid the outflow that has been said before. However, these measures were effective, preventing the assets’ loss? Obviously, the answer is no. Let’s consider the british market, for example. After the reopening, the London bourse (stock market) faced a huge loss that would get to it’s bottom only 3 years later, in 1918. It happened due to lack of buyers on the market and the high of the nation’s bonds, used to fund the expenses of war. All the stock markets around the globe faced a downward movement during that time? Not at all. There was a market that faced a rise on its prices and consolidated itself as the world’s most powerful nation after the First World War. Let’s analyze the United States of America case.


Although not having any conflicts in it’s territory during the WWI, the USA were affected by the uncertainty feeling that prevailed in Europe. During the NYSE closure, negotiations kept occurring (just like overseas) and, using data provided by Global Financial Data, we are able to see that the Dow Jones Industrial Average (DJIA), an index formed by the 30 biggest industrial american companies, saw its lower on november 2nd, 1914, preceding a bull-market that happened on the following year. American investors saw the war as a way of having profit with industrial goods and belic materials. The DJIA behavior can be seen in the following picture:


At the end of the war time, there was an enormous drop on the american stocks’ prices, since the huge profits expectations were frustrated by weak results. Nonetheless, even with that fall, the USA gained global importance, becoming the world’s main financial center in place of England, which was facing an economic crisis and lost it’s role. In this way, we can observe how the war affected worldwidely. When a new conflict, of worldly proportions, began 21 years later, investors and statesmen’s behavior was the same?


The 1930s were a very difficult time. It began with the greatest crisis capitalism had ever seen, after Wall Street’s 1929 crash, that led the whole planet (especially USA and Europe) to an economic depression that lasted for 5 years. This hard economic fall faced by nations worldwide resulted in the ascension and consolidation of radical, ultranationalist movements, such as german nazism. The movement, lead by Adolf Hitler, seek for empowering nazi Germany (known at the time as “The Third Reich”), annexing several european countries, such as Czechoslovakia, Austria and Poland, and extermining groups that were not the Aryan race. These reasons lead, primarily in Europe and afterwards the entire world, to the greatest conflict that mankind has ever seen. The United States, which during WWI had a subtle appearance, suffered huge losses, after being attacked by the japanese during the Pearl Harbor event. Japan was part of the Axis, alongside with the nazi Germany and fascist Italia. With that attack, the american country joined the clash with the Allies (Great Britain, France and, after a time, Soviet Union). Once again, I ask you: how did investors react to such an enormous combat? Were the measures, that were taken two decades before, taken again?


In 1937, DJIA commenced a steep fall. Hitler’s extreme actions caused investors fear. As from 1939, with the sequence of axis’ victories, markets saw, primarily, devaluation of its prices, except Germany's stock market, that was on an upwards movement, due to the increase of internal production to sustain its military needs. But, the pattern observed on the following years was the opposite of the one observed in the first conflict. From the second quarter of 1942, markets started to show positive feelings. The tipping point was the Battle of Midway, where the United States conquered the islands in the Pacific Ocean. This was the first of many great losses that eventually occurred on the axis’ side. Besides, markets started to consider Germany’s expansion as unsustainable in the long term. So, expectations on the allies’ victory made prices go up. In the following picture, it’s possible to see the events and the DJIA recovery after the 1942 bottom:


In that way, it can be seen how the greatest countries reacted to the Second World War. Vast economies, such as England and France, were affected more than others given their proximity to the battlefield. However, with the Axis’ sequence of losses in every front, stock markets began a bull market. At the end of the combat, dividends paid were the highest until that moment, given the profit that companies had funding the war. Therefore, the patterns seen 25 years before the beginning of WW2 were not seen during the conflict.


Lastly, this text will analyze an event of worldly consequences. It wasn’t a war, though, but caused a conflict and effects that are still felt nowadays. On september 11th, 2001, two aircrafts (one from United Airlines and one from American Airlines) were hijacked and flown directly into the World Trade Center, iconic towers at Lower Manhattan that fell a couple hours later. At the same time, another hijacked American Airlines plane crashed into the Pentagon and another United Airlines aircraft crashed into the ground, on the countryside of Pennsylvania, in the city of Shanksville. What was happening at that moment was the biggest terrorist attack against the US in history. Terrorists from the extremist group Al-Qaeda, led by Osama Bin-Laden, took full responsibility for the event that took almost 3000 lives and unveiled major flaws in the country's homeland security. With that being said, how global markets and, in especial, NYSE, reacted to the fall of the WTC?


After the attack, NYSE and Nasdaq (technology companies exchange) were closed for 6 days, trying to avoid chaos and panic-caused sales. Although, after reopening, on september 17th, there was a 7,1% fall (the biggest fall until that moment). At the end of the week, DJIA had accumulated 14% of loss, whilst S&P500 had 11,6% of devaluation, showing the feeling that investors were having at that moment. Another signal was the sudden rise of gold, that jumped from US$215,50 the ounce to US$287. But, have this feeling prevailed, changing the way investors used to see the US? The answer, obviously, is no. Less than a month after the event, assets’ prices returned to the value before 09/11. Some sectors were more affected, like airlines and insurance sectors. However, the biggest impact was the rise of the country’s public debt, used to fund the War on Terror (military campaign led by George W. Bush against, mostly, Iraq and Afghanistan). In that way, Al-Qaeda’s attack had consequences that are felt until nowadays.

When we look at history, we are able to notice that the events are unique, such as its effects, having similarities in human behavior though. One thing is for certain: investors always seek to increase their profits, even in tragic and turbulent situations. This behavior can be noticed in human history on several occasions and can be expected, again, in future events.


Escrito por: João Lucas Rossi Mazzoni