U.S. stock markets closed the month with the biggest rally since September 1939 Thursday, defying what is typically a volatile month for equities.

Although Wall Street ended the month with a dip — the Dow Jones industrial average, the Nasdaq and the S&P 500 all closed lower Thursday — the overall performance was enough to cap the best September in seven decades, and one that had echoes of the start-of-war rally markets put out in 1939.

Both rallies have occurred in defiance of massive economic uncertainty in the global economy, and both were lifted by speculation rather than any solid economic indicators to justify them.

In September 1939, it was the prospect of war in Europe. Germany invaded Poland on Sept. 1 and the brazen attack resulted in a buying frenzy on the market fuelled by the idea that certain U.S. companies would profit from the war.

Similarly, the recent rally emerged in the face of waning double-dip recession fears, as well as expectations that the United States is willing to inject more stimulus into the economy if necessary.

Of course, the September 1939 rally was also followed by six years of a range-bound market — the Dow peak at 155 points in 1939, and didn’t return to that high again until 1945, after the end of the war.

Markets are not likely to follow a similar scenario, according to Bill Strazzullo, chief market strategist at Bell Curve Trading.

“We’ve been in this particular range mode since May,” he said. “Of course in 2008 we had a big downward move, and in 2009, we had a big upward move, so this is expected — the markets are consolidating. And the question is, how is that going to break?”

Mr. Strazzullo said with U.S. mid-term elections coming up, markets are likely to decide then whether they will break key levels for the Dow, Nasdaq and S&P 500 to begin upward climbs or downward moves.

The current September surge is the biggest monthly gain for S&P 500, which closed at 1,141.20, since April of 2009. The Dow meanwhile posted its biggest monthly point gain since April 2001, closing at 10,788.05.

And while Canadian stocks haven’t seen the same level of gains that U.S. stocks have, the Toronto Stock Exchange nonetheless hit its highest level in two years on Wednesday, boosted by rising oil prices and strong gains from tech giant Research In Motion.

The similarities between September 2010 and September 1939 however don’t end at just the strength of the rallies amidst global uncertainty. There’s also another shared commonality: the prospect of war.

In this instance, however, it’s not likely the kind of war to be fought with tanks and guns.

“The risk of a trade war [between the U.S. and China] appears particularly high,” said Colin Cieszynski, analyst with CMC Markets Canada, in a note.

On Wednesday night, the U.S. House of Representatives passed a bill that enables it to determine how much it believes China’s currency — the yuan — is undervalued, and then raise tariffs against the Communist country by an equal amount.

Unfortunately, the threat of a modern-day trade war definitely won’t lead to the kind of pre-war rally seen in 1939. Back then, stocks surged because investors hoped they could capitalize on American companies selling products to European combatants.

“Trade wars have had major bearish impacts on markets before,” said Mr. Cieszynski. “In 2002, for example, the imposition of steel tariffs by [former U.S. president George W.] Bush against China and other countries coincided with the start of the final down leg of the 2000-2002 bear market, and a peak in [the U.S. dollar] that kicked off a downtrend in the currency that continues to this day.”

However, the good news — if you can call it that — is that the kind of flat, range-bound market that plagued the six years during the Second World War looks unlikely to happen today.

“Markets are waiting for the next major development to tell us if the recovery is on track or not,” said Mr. Strazzullo. “Whether that breaks to the upside or downside, that’s a different story. But I expect it to do one or the other — likely by the U.S. mid-term elections in November.”

Financial Post