The day before the Japanese attacked Pearl Harbor, the Dow was
down 25 percent from its 1939 high and still less than one-third its 1929
peak. Stocks fell 3.5 percent on the day following Pearl Harbor and con-
tinued to fall until they hit a low on April 28, 1942, when the United
States suffered losses in the early months of the war in the Pacific.
But when the tide turned toward the Allies, the market began to
climb. By the time Germany signed its unconditional surrender on May
7, 1945, the Dow Industrials were 20 percent above the prewar level. The
detonation of the atomic bomb over Hiroshima, a pivotal event in the
history of warfare, caused stocks to surge 1.7 percent as investors recog-
nized the end of the war was near. But World War II did not prove as
profitable for investors as World War I, as the Dow was up only 30 per-
cent during the six years from the German invasion of Poland to V-J Day.Post-1945 Conflicts
The Korean War took investors by surprise. When North Korea invaded
its southern neighbor on June 25, 1950, the Dow fell 4.65 percent, greater
than the day following Pearl Harbor. But the market reaction to the
growing conflict was contained, and stocks never fell more than 12 per-
cent below their prewar level.
The Vietnam War was the longest and one of the least popular of all
U.S. wars. The starting point for U.S. involvement in the conflict can be
placed at August 2, 1964, when two American destroyers were report-
edly attacked in the Gulf of Tonkin.
One and a half years after the Gulf of Tonkin incident, the Dow
reached an all-time high of 995, more than 18 percent higher than before
the Tonkin attack. But it fell nearly 30 percent in the following months
after the Fed tightened credit to curb inflation. By the time American
troop strength reached its peak in early 1968, the market had recovered.
Two years later, when Nixon sent troops into Cambodia and interest
rates were soaring and a recession was looming, the market fell again,
down nearly 25 percent from its prewar point.
The Peace Pact between the North Vietnamese and the Americans
was signed in Paris on January 27, 1973. But the gains made by investors
over the eight years of war were quite small, as the market was held
back by rising inflation and interest rates as well as other problems not
directly related to the Vietnam War.
If the war in Vietnam was the longest American war, the 1991 Gulf
War against Iraq in the Middle East was the shortest. The trigger oc-
curred on August 2, 1990, when Iraq invaded Kuwait, sending oil pricesCHAPTER 13 When World Events Impact Financial Markets 233