World War II and Global Equity Markets (1939–1945)

The Second World War dwarfed its predecessor in scale, duration, and economic impact. Yet financial markets, having learned from the 1914 experience, handled the crisis very differently — and the post-war settlement created the framework for the greatest bull market in history.

The Approach of War (1937–1939)

Unlike 1914, the approach of World War II was gradual and broadly anticipated. Markets had time to price in rising tensions:

• The Anschluss (March 1938) and Munich Crisis (September 1938) caused sell-offs followed by relief rallies
• The Dow Jones fell 49% from its 1937 peak to its 1938 trough, driven partly by recession and partly by war fears
• When war was declared on 3 September 1939, the initial market reaction was actually positive — the Dow rose 7.5% in two days, as uncertainty was resolved

Exchange Operations During the War

Unlike WWI, most major exchanges remained open throughout the conflict:

• New York: The NYSE operated continuously, though with restrictions on short selling and margin requirements
• London: The LSE remained open but operated under severe constraints, including restrictions on new issues and price controls
• Continental Europe: Exchanges in occupied countries operated under German supervision. The Paris Bourse functioned throughout the occupation, though trading was heavily controlled
• Tokyo: The Tokyo Stock Exchange operated until 1945, when bombing made physical trading impossible

Market Performance by Region

United States

The US market initially declined with the fall of France in 1940, reaching its wartime low in April 1942 after Pearl Harbor and early Allied defeats. From that low, the Dow rose approximately 130% by the war's end, driven by:

• Massive industrial production for the war effort
• Full employment and rising corporate earnings
• War-bond campaigns that absorbed excess consumer savings, reducing inflation pressure
• Growing confidence in Allied victory after Stalingrad and Midway

United Kingdom

British equities performed surprisingly well during the war. The FT 30 index roughly doubled between 1940 and 1945, as investors anticipated post-war reconstruction and bet on continued industrial strength.

Germany and Japan

Axis nation equity markets were heavily manipulated during the war and effectively destroyed afterward. German shareholders lost virtually everything in the post-war currency reform of 1948. Japanese equities were similarly devastated, though the Tokyo Stock Exchange reopened in 1949 under American occupation.

The Post-War Settlement

The war's aftermath created the conditions for an unprecedented period of equity market growth:

1. Bretton Woods system: The 1944 agreement established fixed exchange rates anchored to the US dollar, providing monetary stability for international trade and investment
2. Marshall Plan: American capital rebuilt European economies, creating demand for both American exports and European equities
3. Military-industrial complex: Permanent defence spending created a reliable floor for a significant segment of the equity market
4. Consumer boom: Pent-up demand and wartime savings fuelled a consumer spending boom that drove corporate earnings for a generation
5. Regulatory framework: The SEC, established in 1934, had matured into an effective regulator, boosting investor confidence

The Great Post-War Bull Market

From its 1942 wartime low to its 1966 peak, the Dow Jones Industrial Average rose more than 900%. This was fuelled by:

• Rapid GDP growth across the developed world
• Rising corporate profits from consumer spending and defence contracts
• Growing retail investor participation
• Stable monetary conditions under Bretton Woods

Key Differences from WWI

Factor	WWI	WWII
Exchange closures	Months-long closures globally	Most exchanges stayed open
Market anticipation	Sudden onset, panic reaction	Gradual build-up, priced in
US market role	Became dominant during war	Already dominant, cemented position
Post-war system	Unstable reparations and war debts	Bretton Woods stability
Recovery timeline	Uneven, led to 1920s speculation	Sustained 25-year bull market

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Part of the Conflicts and Equity Markets article cluster.