Resilience

In the early forties, captured German soldiers were brought to the US for labor and loaded on trains headed for the West. At the time of departure, the soldiers would speak confidently of Germany's inevitable triumph—their superior training, military might, and leadership. The train took many days to cross the Continental US, and in that time the German soldiers saw much of the East Coast, the Heartland, the Rocky Mountains, and finally the bounteous Californian landscape.

By the time they arrived, the confident tone had changed to despondency. Seeing the vastness of the US, the diversity of its people—the sheer size and scope of her resources—they knew without question Germany could never win the war.

Our parents told us this story when we were young to remind us of the resiliency and strength of the United States. Maybe the story's true, maybe it's apocryphal. Who knows? To this day it's a favorite family anecdote.

Milton Friedman once said, "A society that puts equality... ahead of freedom will end up with neither." And so it is with the United States. The resolve and resiliency of its self-determined people, whose interest in their country coincided with their sense of personal responsibility for their own lives and the lives of their families, was ultimately a power stronger than any authoritarian government.

December 7, 1941 is a day remembered as pivotal in US and world history. On the 66th anniversary of the attack on Pearl Harbor, it's worth assessing the impact of Pearl Harbor on the national psyche and economy.

This most dire of threats, created by the partial crippling of the US Pacific Fleet, and the overrunning of most of the South Pacific by the Imperial Japanese Navy was a palpably felt danger in a way not repeated perhaps until 9/11. Fear, anger, disbelief, and pessimism dominated.

The dampening effect on national sentiment was real, but surprisingly contained for the month of December 1941 amongst the investing community. US stocks declined a mere 3.9%. This is a strange thing compared to recent negative market volatility, where global equities declined 10% in a few weeks predominantly over credit market worries.

Today's fears appear out of proportion compared to the US's entry into the war, when much of Western Europe was by then overrun with Nazi occupation, Operation Babarossa was well under way in Russia, Britain hung by a thread, and most of the South Pacific was already held by Japan.

The Doolittle Raid over Tokyo in April 1942 gave us hope, but did little to improve investor sentiment. For the first third of 1942 the stock market declined 9.6%. However, given the magnitude of military power arrayed against the Allies, the stock market demonstrated a remarkably measured response to then-current events.

It can be argued that markets effectively discounted the risk of world war very well, and in advance of most war analysts' at any rate. Stock markets demonstrated an almost prescient quality in recognition of our ultimate economic and military superiority.

Soon after, the Battle of Midway was won in June, El Alamein in October, and Stalingrad by year's end. US stocks turned in an astounding 23% for the year despite the uncertainty.

Pearl Harbor and the outbreak of World War II was a market risk of the highest order—the free world was at stake. Markets held their ground, and ultimately forecasted an allied victory and burgeoning economy thereafter.

If you believe the market as a discounter of all widely known information (as we do), then today's stock market is telling us all is well, despite our worst fears. Things may feel bad today, but global markets are up nicely, and economies are weathering the storm of credit and housing trouble with aplomb.

December 7th, 1941 is a time to honor the deep sacrifices made to preserve our way of life. It is also a time to pay tribute to the resiliency, strength, and versatility of the US and its people. Let us remember that much for today's world as well.

Have a great weekend.