Going Viral: The Impact of Epidemics on the Stock Market

Going viral commonly refers to the sensation of something (most recently baby Yoda memes) spreading quickly via internet sharing (social media, YouTube, etc.). However, over the past few weeks the term viral harked back to its source as the Wuhan Coronavirus has dominated the news cycle. First detected in the Chinese city of Wuhan, the largest in the Hubei region with a population of over 11 million people, the virus has since spread within China and beyond. As of January 27th, the CDC has confirmed five cases in the United States and additional cases in at least 12 more countries. Loss of life is of course the most devastating part of this epidemic, but I’d like to examine its impact on the financial markets. 

We find ourselves in the midst of the longest bull market in United States history, and I continue to watch pundits point to a plethora of risks that could finally slam the brakes on the current expansion and resuscitate the long hibernating bear. Notable market threats of late include trade tensions with China, Brexit, and rising valuations, but I haven't heard a single economist or pundit foretell a Chinese, and possibly global, epidemic. To better understand how the Wuhan Coronavirus might impact the U.S. financial markets I have examined four recent outbreaks and the trailing stock market returns. 

SARS (2003):

Another illness caused by a coronavirus, the SARS outbreak started in Asia and eventually spread throughout the world. The World Health Organization (WHO) reported 8,098 illnesses resulting in 774 deaths. During the height of the SARS scare the S&P dropped approximately eight percent (travel, consumer discretionary, and Asian economy exposed stocks further under-performed). However, in the succeeding six months the S&P recovered, gaining almost 19 percent.

Swine Flu (2009)

The novel influenza virus (H1N1) that became known as “swine flu” started with outbreaks in North America in April 2009. The WHO declared a pandemic in June 2009, when the outbreak had reached 74 countries or territories. The CDC estimates that over 60 million cases and 12,496 deaths resulted from the swine flu. When the illness was making headlines the U.S. stock market was just emerging from the March 2009 bottom of the great recession and many were certain the outbreak would slow, or even destroy the recovery. And while the market did react by shedding 7 percent at one point, the S&P went on to gain almost 19 percent in the following six months and nearly 37 percent in the trailing 12 months. 

MERS (2013)

Middle East Respiratory Syndrome (MERS) was first reported in Saudi Arabia in 2012. To date, all cases of the illness are linked directly to the Arabian Peninsula, either via travel or residence. All told, approximately 1,000 cases of the virus have been confirmed resulting in over 400 deaths according to the WHO. Possibly due to the more limited geographic impact, the S&P only dropped about one percent during the height of the attention and went on to gain over 15 percent in the next six months. 

Ebola (2014) 

Another scary name for an equally scary virus. The Western Africa Ebola epidemic virus was the most widespread outbreak of Ebola in history, primarily impacting the Western African countries of Liberia, Sierra Leone, and Guinea. The final death count was 11,310 people (including one American), of 28,616 recorded cases. While transportation stocks were once again hit, the Dow Jones Transportation index dropped approximately five percent, but recovered quickly; the broader markets were largely unaffected. 

A 2006 Fidelity study on the effects of pandemics upon stock-market returns concluded,

“we cannot draw any fixed conclusions about the effects of pandemics upon stock-market performance. Equity markets react unpredictably to the unknown; nevertheless, such events should not be examined in isolation but viewed in common with other prevailing market conditions.”

While we can’t yet know the scale of the Wuhan outbreak and its impact on global economies, we do know that fear induced pullbacks often present good buying opportunities for U.S. stocks. Could this be the “black swan” event that closes the door on the current expansion? Perhaps. Or is it an opportunity to put some cash to work before a rebound occurs? Only time will tell but historically disease-related pullbacks increase volatility but don’t cause bear markets. No matter your stance please consider your long-term objectives when making any changes to your portfolio.