Markets during Outbreaks

Hello, 

Yes, it is cold and flu season, but the Coronavirus is not your normal cold or flu which has potential impacts to financial markets. 

In this month’s newsletter I will share with you how stock markets performed during past viral outbreaks. 

So far North American stock markets have been experiencing increased volatility as investors keep an eye on the deadly flu outbreak in China. However, based on the market’s performance during the onset of other infectious diseases, including SARS, or sever acute respiratory syndrome, Ebola, and avian flu, investors may have little to financially fear that this disease will sicken a U.S. stock market that finished 2019 with the best annual return in years and has kicked off 2020 at or near all-time highs. That said, the ability of the virus to halt travel and harm consumption, particularly in Beijing, are some of the ways an outbreak could have economic implications that could wash up on North American shores. 

The degree by which stock markets have been mostly immune to the Coronavirus thus far is something that hews stock markets historical reaction to such outbreaks and quickly spreading diseases. According to Dow Jones Market Data, the S&P 500 posted a gain of 14.59% after the first occurrence of SARS back in 2002-03, based on the end of month performance for the index in April 2003. About 12 months after that point, the broad-market benchmark was up 20.76%. SARS resulted in a total of about 8,100 people being sickened during the 2003 outbreak, with 774 people dying. 

Separately, the S&P 500 rose 11.66% in roughly six months following reports of the 2006 Avian flu virus – a fast-moving pathogen also known as H5N1. The market gained 18.36% in the following 12-month period. Data are similar for equity performance across the globe based on data from Charles Schwab, tracking the MSCI All Countries World Index. The index gained an overage of 0.4% in the month after an epidemic, 3.1% in the ensuing six-month period and 8.5% a year later. The severity of the virus, ultimately, will dictate the market’s reaction and just because indexes have managed to shrug off the contagion from outbreaks in the past doesn’t mean that will be the case this time. For one, Coronavirus comes during the important Lunar New Year, when Asia tends to see peak travel and consumer spending. 

On top of that, markets may be vulnerable to swoons after bursting records. In a stock market where the dominant factor is price momentum, the impact of a change occurring in an external risk or a natural risk phenomenon is intensified.

Benjamin Graham, the father of value investing said it the best when he said, ‘in the old legend’ the wise men finally boiled down the history of mortal affairs into a single phrase: “this too will pass”.

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