With the coronavirus spreading and equity investors panicking, you might be wondering where this all will lead.
Although the coronavirus may be new, it certainly isn’t the first pandemic to strike the world. AIDS first appeared in June 1981. Since then we’ve had SARS, avian flu, swine flu, MERS, Ebola and Zika, to name a few.
At the moment, we don’t know what the outcome of the coronavirus pandemic will be, nor how stock prices will end the year. But the historical correlations between stock prices and worldwide disease outbreaks suggest the current situation could be short-lived.
Data from Dow Jones and MarketWatch indicates that of the above pandemics, only two resulted in an S&P 500 decline over the 12 months following the outbreak of the disease. The first was AIDS. By June 1982, stock prices had dropped by more than -16%. The other was the measles outbreak in December 2014. But in the latter case, the one-year decline in the S&P 500 was less than -1%.
After every other pandemic except one, the S&P 500 had grown by double digits over the subsequent 12 months. The market’s reaction to one in particular – the swine flu pandemic beginning in April 2009 – was to soar nearly 36% in one year.
Note that the poor longer-term market performance after AIDS also could be attributed to the high inflation and low economic growth (called stagflation) occurring at the same time. And the explosive growth of the S&P 500 beginning in 2009 coincided with the end of the Great Recession. This serves to point out that there are actually many factors that drive market returns, not just the virus or whatever the media happens to be focusing on at the time.
Even just six months after the occurrence of every pandemic over the past 40 years, the market was up on average 9.3%, and the only decline was a paltry -0.3% (AIDS again). The 12-month average growth was higher at 13.6%.
Could this time be different? Certainly. But we can say that historically, Wall Street's reactions to global health crises has been generally short-lived. Perhaps it’s because the economic fallout has always turned out to be less than feared. Or because health organizations have at some point always been able to get some control over the spread of the disease. And with summer only three months away in the northern hemisphere, there’s the possibility that coronavirus will fade in much the same way the flu does. After all, so far there have been few reported cases of coronavirus in places like India and Australia currently experiencing summer-like heat.
Just as health officials recommend washing your hands frequently to avoid catching the disease, financial planners should be advising you not sell your stocks in the midst of all this volatility. Those who are selling are locking in losses. Your savings may take a short-term hit on paper, but over the long term, you probably won’t even remember how scary everything seemed at the time.