Monday, July 28, 2014

Geopolitics and the Stock Market: A Lesson from the Start of the Great War

World War 1 started 100 years ago today and to the stock market it seemed to come from totally out of the blue. Simply put the stock market failed miserably as a discounting mechanism. Why? The markets were unduly complacent about international affairs where from 1900 – 1914 there were two Moroccan crises and two Balkan Wars that many thought that any one of them would lead to a general war. Those crises were settled diplomatically and thus when the Austrian Archduke Franz Ferdinand was assassinated in Sarajevo by a Bosnian terrorist in the pay of Serbia, the markets thought nothing of it.

Although the U.S. was far away from the enveloping European Crisis as an emerging market, it was unduly dependent upon the inflow of foreign capital. As the crisis came to a boil European investors liquidated their U.S. holdings and the Treasury feared a run on gold. The stock exchange closing along with other measures short circuited the run and enabled the U.S. to remain on the gold standard.

The July 1914 complacency is eerily reminiscent of the world today. We are now in the midst of the second Ukrainian crisis of the year, from Libya to Iraq the Middle East is in flames, and China is making serious naval probes in Southeast Asia. In all likelihood the world will muddle through, but the lesson of 1914 is disquieting.

Here is a thumbnail history of the Dow Jones Industrial Average matched with the events of 1914. A casual reader will note that the stock market did not respond to the events in Europe until war was imminent.

Date           DJIA       Event

January 2 –  57.6       Year Opens

March 20 -   61.1       Year High

June 27    -    58.7       Day before Assassination

June 29   -     58.6       Day After Assassination (Market closed on June 28)

July 22     -    59.2       Day Before Austrian Ultimatum

July 23     -     59.0      Austria Delivers Ultimatum to Serbia

July 28     -     55.9      Austria Declares War on Serbia – WW 1 Begins

July 29    -      56.2       Relief Rally

July 30    -      52.3       Russia Mobilizes

July 31    -                    Stock Exchange Closes

Aug  3     -                   Germany Invades Belgium

Dec 12    -       54.6        Market Reopens

1 comment:

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