The Shocking History of Market Shocks

We suspected the stock market would take a fright following last weekend’s terrors.

It did not. The stock market yawned them off. Why?

Today our thoughts turn to the sanguinary arts and sciences… and to Wall Street.

That is, our thoughts turn to carnage, markets and how the two mingle.

To what extent does warfare — or the prospect of warfare — manipulate markets?

Much? Little?

Our own James Altucher ransacked market history.

From the Second World War clear through the tumults of Sept. 11, 2001, James stretched it all upon his canvas… rolled his sleeves, spat upon his hands… and got working.

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

10 Market Shocks

James identified 10 such potential hells and their dates. The most conspicuous among them were:

The commencement of World War II (Sept. 1, 1939)…

Pearl Harbor (consult a book 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 the shock… and its panicked low the week following the shock.

He then inspected 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.”

That is correct. The stock market took the blow and plowed on.

Big Deal, Says Wall Street

When Herr Hitler blitzkrieged Poland on Sept. 1, 1939 — no average day — the market largely shrugged its shoulders… as if it was an average day.

The S&P took a slip. It found a shallow bottom merely days after.

It proceeded higher for the next six months… as if the kraut soldaten were tourists on holiday… taking in the pleasant sights of Europe.

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

The Federal Reserve had yet to assume the role of stock market guardian and savior.

Only in recent decades has it taken up that high and solemn duty.

We cannot therefore credit the Federal Reserve for the stock market’s steadfastness.

Next we come to Pearl Harbor and its Dec. 7 Japanese visitation…

Another Yawner

It is true, the market took a good stagger after Pearl Harbor.

And the S&P proceeded lower into January 1942. Yet it was up and punching shortly thereafter.

It remained up and punching for the war’s duration.

The S&P opened each year higher than the previous year — until 1946.

Of course comes the objection: Stocks were up and away on the prospects of ultimate Allied victory.

Just so. Yet the S&P had found its legs in January 1942.

What was occurring in January 1942?

In January 1942 Japan was trouncing the American Navy and the Germans were amok in Europe.

That is what was occurring in January 1942.

The war tide only swung America’s way after the Battle of Midway in June 1942 — several months after the market tide swung Wall Street’s way.

But to proceed…

Armageddon? Whatever

What about October 1962 and its famous missiles? Did the nuclear brinkmanship traumatize stocks as it traumatized people?

It was — after all — a very near-run thing. Never had the world stood so precariously upon the devil’s shovel.

Yet it did not traumatize the stock market.

After a brief fright the S&P went whistling on, merry as a grig, carefree as a bird.

It saw the doomsday clock flashing 11:59 a.m. — not 11:59 p.m.

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

The market spent the following three decades mocking Armageddon. James:

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

Finally we come to Sept. 11, 2001…

Did the Plunge Protection Team Intervene?

The very date makes an icicle of our spine.

We were within direct eyesight of the World Trade Center that morning… and gazed in horror as its clone towers went heaping down.

Markets were shuttered that entire week. They traded down heavily upon reopening.

Yet one month later, the S&P was a mere 15 points from its Sept. 10 closing.

Six months after the evil day the S&P was 73 points above its Sept. 10 closing.

Many credited the silent hand of the Plunge Protection Team, so-called.

It is formally the President’s Working Group on Financial Markets.

Its purpose is to stretch a safety net across the canyons of Wall Street… and arrest the plunging stock market before its encounter with pavement.

Through executive order President Ronald Reagan fanned the thing into existence in 1988 — heavily in response to 1987’s “Black Monday” plunge.

But the stock market bounced several stories higher for the next six months — a period during which Enron toppled, incidentally.

The Plunge Protection Team may interrupt a plunge. But can it send the plungee vaulting higher for six months?

A net is not a springboard.

The Fed Changed Everything

James’ study concluded before 2008. Thus the ensuing travails never came under his bifocals.

Of course, the Federal Reserve’s cosmic money-conjuring after 2008 — and again from 2020–2022 — likely negates all comparison to pre-crisis events.

You have apples and you have oranges.

Were you aware that since January 2020… the Federal Reserve manufactured some 80% of all dollars in current existence?

It is true. How many of them went piling into stocks? We hazard the number is handsome.

Prior to 1988 at least, the stock market largely went along on its own steam.

Not entirely perhaps. Yet largely.

What are we to conclude?

If James is correct, market shocks may prove less shocking than feared. From whom:

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

We cannot dispute the first point. And we are consoled by the second point.

Yet given the enormity of current financial and monetary arrangements… we cannot put away the suspicion that this system may not withstand the next shock.

By our own admission, we yanked the same alarm in 2008.

And in 1987. And in 2001. And in 2020.

Each time our alarms proved false. The financial and economic systems absorbed the blows.

The financial and economic system may well absorb the next blow.

Yet the thing squats upon a foundation constructed increasingly of sand.

And only a fool erects a house on sand…

The Daily Reckoning