The Shocking History of Market Shocks

It is now an article of faith…

Pre-2008 markets were far more sensitive to negative shocks than today’s.

Because of the Federal Reserve’s massive interventions since the crisis… today’s markets are not nearly so sensitive to shocks.

But is it true?

Our own James Altucher once ran a fascinating study…

He ransacked market history from WWII through the seismic events of Sept. 11, 2001.

His purpose: to study the impact of potentially systemic shocks on markets.

James identified 10 bolts from the clear blue that could have flattened markets.

The most conspicuous among them:

The beginning of WWII (Sept. 1, 1939)…

Pearl Harbor (ask someone if you must)…

The Cuban missile crisis (Oct. 22, 1962)…

Sept. 11 itself.

James recorded the S&P’s activity the day before the shock… the day after… and its panicked low the week following the event.

He then examined the S&P one week later, one month later and six months later.

His conclusion?

“Each time, the market has absorbed the shock and moved past the event.”

When the Germans invaded Poland to lift the curtain on WWII — no average day — the market acted like it was… just an average day.

The S&P took a slip and found a shallow bottom just days after.

It then marched higher for the next six months… as if Herr Hitler’s soldaten were mere tourists taking the pleasant sights of Europe.

Why weren’t markets in headlong retreat along with Western Europe?

Didn’t they know?

The Fed wasn’t in the business of propping stocks in those days. So the answer must lie elsewhere.

Yes, the market reaction to Pearl Harbor was more pronounced.

The S&P went lower into January ’42. But it rediscovered its fighting élan shortly thereafter.

And the S&P opened every year higher than the last until 1946.

Of course, comes the objection: Stocks naturally rose on the prospects of ultimate Allied victory.

Yes, but the S&P had stabilized in January ’42… as U.S forces were getting licked by the Japanese and the Germans still ran amok.

American fortunes only changed after the Battle of Midway in June ’42… after the S&P had already turned.

What about the Cuban missile crisis in October ’62?

The world was never closer to the brink.

But after a brief stagger, the S&P went whistling ahead, merry as a grig.

“What is most interesting is the ferocity with which the market rallied in only a few months,” said James.

Apparently, the specter of nuclear oblivion — a sword of Damocles hovering over markets for the next 30 years — was never the bugaboo many feared.


The party started in 1962 and continued for the next seven years, resulting in the biggest bull market in history until the 1990s.

Ah, yes, but Sept. 11, 2001…

The date itself makes an icicle of our spine.

Markets were closed the whole week after the horrors. And traded down heavily upon opening.

But one month later, the S&P was just 15 points off its Sept. 10 closing.

And just six months afterward, the S&P was 73 points higher than its Sept. 10 closing.

Many suspected the silent hand of the Plunge Protection Team when stocks miraculously recovered after markets reopened.

But it doesn’t explain the next six months — a period during which Enron collapsed, incidentally.

James’ study ended before 2008, so the ensuing crisis never came under his bifocals.

The S&P has trended in an upward channel since 2010 — more or less.

Indeed, it now seems to be “melting up.”

Of course, the Fed’s cosmic money printing since 2009 likely negates any comparison to pre-crisis events.

$4.5 trillion of newly conjured money tends to… distort the picture.

But if James is right overall, shocks may prove less shocking than feared:

The nation has nevertheless undergone shocks to the system that we have survived and will continue to survive.

We can’t challenge the first point. We’re consoled by the second.

But given the size of the current bubble, we can’t put away the suspicion that the system might not survive the next shock.

Of course, we said the same thing in 2008.

And 2001. And 1987.



Brian Maher
Managing editor, The Daily Reckoning

The Daily Reckoning