What Happened to the Stock Market During World War 2?

World War II represented a global conflict, profoundly reshaping societies and economies. Financial markets, indicators of economic sentiment, reacted complexly to this tumultuous period. Understanding how the stock market behaved during this time requires an examination of the initial global reactions, the transformation of the U.S. economy, government interventions, and market performance from the war’s onset to its conclusion.

Initial Global Market Reactions

The outbreak of war in Europe in September 1939 generated immediate but varied responses across global financial markets. While uncertainty was prevalent, the U.S. stock market, the Dow Jones Industrial Average (DJIA), climbed approximately 10% on September 5, 1939, the first trading day after the invasion. This reaction defied expectations of a market crash, showing markets might react negatively to the prospect of war but rebound once conflict begins.

European markets, however, experienced more direct, negative impacts. Stock exchanges in countries like France and England initially saw declines. Germany’s stock market, conversely, showed initial gains coinciding with early military successes. Some exchanges, particularly in invaded nations, temporarily closed, for instance, the Brussels stock exchange closed in June 1940 and reopened in September 1940. Commodity markets also shifted, with gold prices decreasing in the first year of conflict, while U.S. inflation began to rise.

The US Economy’s Shift to War

The United States’ entry into World War II transformed its economy, pulling it from the Great Depression. Industrial capacity massively redirected towards the war effort, leading to unprecedented production. The gross national product (GNP) in constant dollars surged from $88.6 billion in 1939 to $135 billion in 1944. War-related production, only two percent of GNP in 1939, escalated to 40% by 1943.

Factories manufacturing consumer goods (e.g., automobiles) were retooled to produce military equipment (e.g., tanks, aircraft, munitions). Industrial mobilization absorbed unemployed labor, plummeting the national unemployment rate from roughly 25% during the Great Depression to 1.2% by 1944. Corporate profits increased due to government contracts for war materials. For example, between 1940 and 1944, the U.S. government awarded $175.066 billion in prime defense contracts, with two-thirds going to just 100 companies; Navy contractors averaged close to 8% profit.

Government’s Role in Financial Stability

The U.S. government undertook measures to finance the war and maintain economic stability, directly influencing the financial environment. A primary financing method was the sale of war bonds, notably Series E bonds, promoted through patriotic campaigns. These bonds absorbed excess consumer liquidity, helping to manage inflation and providing funding for military operations. By 1945, $200 billion in war bonds had matured, reflecting public investment in the war effort.

To control inflation, which rose during the war, the government implemented price and wage controls. The Office of Price Administration (OPA) set ceilings on prices and rationed essential goods (e.g., gasoline, meat, sugar). This prevented runaway inflation that could have destabilized the economy and eroded purchasing power. Tax policies were altered to fund the war; the number of Americans paying federal taxes surged from 4 million in 1939 to 43 million in 1945. Federal tax revenue jumped from $8.7 billion in 1941 to $45 billion in 1945, with income tax rates reaching 94% for top earners and 23% for those earning as little as $500 per year.

The Federal Reserve facilitated government borrowing by maintaining low interest rates. The Fed pegged Treasury bill yields at 0.375% and long-term bonds at 2.5%, ensuring low-cost government borrowing for wartime expenditures. This made government bonds less attractive than equities, indirectly supporting the stock market. These coordinated actions channeled resources toward the war effort while mitigating economic disruption.

Overall Stock Market Performance During the War

Despite global conflict, the U.S. stock market experienced an upward trend throughout World War II. Following the attack on Pearl Harbor in December 1941, the Dow Jones Industrial Average saw a brief dip of 2.9% but recovered those losses within a month. From 1939 to the war’s conclusion in 1945, the Dow rose 50%.

The market experienced a bottom in May 1942, after which it began a bull run through the end of the war. Several factors influenced this performance. Massive government spending on war production injected capital into the economy, boosting corporate revenues and profits, particularly in defense and heavy industries (e.g., aircraft, munitions, shipbuilding). The low interest rate environment, maintained by the Federal Reserve to support government borrowing, also made equities more attractive than fixed-income investments.

With consumer goods production curtailed due to rationing and industrial retooling, Americans had fewer spending opportunities, leading to increased savings. This accumulated capital, combined with a desire to hedge against inflation, likely entered the stock market. The market’s forward-looking nature meant it anticipated positive developments, even amidst negative war news. This resilience allowed the market to climb steadily, foreshadowing a new bull market after the war’s conclusion.