When the U.S. goes to war the reaction in the financial markets is pretty standard. The markets reel on the initial news, particularly the "uncertainty" phase before actual military involvement, and then the markets settle down and sometimes rally. This is, of course, a broad generalization. But when you see analysts, both from the military and financial analysis side, what do you normally hear? Broad generalizations. World War I doesn't exactly fit the neat description.

On February 1st, 1917, the Dow Jones took a 7.2% hit (or a cool 780 Dow points in today's market…as of 9/2). But to understand what happened that day we need to look back at the origins of World War I (very briefly). Someday, maybe we will cover the war in far greater detail.

When Austrian Archduke Ferdinand was shot in Sarajevo, 6/28/14, the Dow Jones stood at 80 (6/27 close). Investors worldwide almost immediately turned bearish, particularly in Europe, for their participation in some sort of wide conflict seemed inevitable. From the period 7/25-7/30, almost all markets in Europe closed for a lengthy spell. London's stock exchange closed on July 31st and stayed that way until 1/4/15. The U.S. declared its intention to stay out of the imminent war and Wall Street was also closed on July 31st, the first time our markets had done that since the Panic of 1873. Wall Street didn't reopen until 12/12/14. In his book "The Bear Book," author John Rothchild makes the observation that "Officials figured if nervous investors had no place to sell their stocks, a bear market couldn't happen. In fact, a bear was already in progress when the shut down was announced. [The Dow had dropped from 80.11 on 6/27 to 71.42 by 7/30]. A flea market for stocks called the 'gutter market,' sprang up outside the exchange, and prices fell some more."

When the market reopened on 12/12/14, the value you will see in most articles (actually, you won't see it anywhere but here) will be listed as 54.62. Fast forwarding, in September of 1916 the Dow expanded from 12 to 20 issues and those new issues were computed back to the reopening of the Exchange on 12/12/14. The "old" figure for the 12 stocks was around 74. "Old" and "new" figures were calculated for the period up to the expansion of the Dow in 1916.

On January 22, 1917 the Dow stood at 96.60. President Wilson had been secretly negotiating with Britain and Germany for the purposes of obtaining their permission for him to mediate. As part of this campaign he went before the Senate to give the "silent mass of mankind everywhere" a vision of a new world. He outlined a just peace that the American people would help to maintain through a league of nations. It would include the freedom of the seas, among other things.

But the Kaiser, Wilhelm II, had different ideas. On January 31 (Dow 95.43), Germany gave 8 hours notice of its intent to sink any ships in the war zone around the British Isles, belligerent or neutral, warship or merchantship. Up until then, Germany had refrained from attacking neutral ships with its feared U-boats. America was permitted just one passenger vessel each week to England. The Kaiser knew this would mean war with America. He risked war because his admirals had guaranteed that England would be on her knees within six months - before an ill-prepared America could help Europe in any real way.

The Wall Street Journal of Feb. 1, 1917, carried a headline, "Germany Withdraws All U-Boat Warfare Pledges." The Dow Jones dropped to 88.52, a 7.2% decline. The following day's Journal brought the news that Germany's action had caused a "severe break" in the stock market. "Nothing counted in the price movement but the German note announcing an unrestricted submarine campaign," the Journal reported. "Values went for nothing as thinly margined securities were wiped out and alarmed holders of stocks sought to save what they could from the wreckage."

Prices declined a bit more on Feb. 2nd, then began to rebound, slowly. On Feb. 3rd, Wilson cut off diplomatic relations, but he insisted that only destruction of American ships and American lives would lead to war. That same day, the American Housatonic was sunk. Over the next 4 weeks other American vessels were lost. Wilson armed the merchant ships but he still felt a draw between the Allies and Germany was the most just conclusion. [Wilson was screwed up].

During the three days, March 16-18, more ships were sunk, one with the loss of 15 Americans. Wilson wanted to be the peacemaker, not war monger. Now he had no choice.

On April 2nd (Dow 97.06), 1917, he gave his "The world must be made safe for democracy" speech. An ill-prepared America was now at war. On 6/9/17, the Dow peaked at 99.08. By 11/8/17, the Dow had slumped 31% to 68.58. American units did not take offensive action until 5/28/18 (Dow 78.42).

[Additional Sources: The Wall Street Journal / John Dorfman. "The American Century," by Harold Evans].

Brian Trumbore