We Have Nothing to Fear, But Fear Itself … or Do We?

We Have Nothing to Fear, But Fear Itself … or Do We?

Despite concerns of the Coronavirus becoming a full-blown pandemic, Mr. Market has been remarkably calm. Overlooking a barrage of jolting headlines, investors shrugged off concerns and U.S. indices went on to set new highs … until Monday, that is. By the close on Tuesday February 25, the S&P had sold off 7.82% from its high and the Dow Jones had retreated 8.41%, effectively erasing all of the year’s equity gains, and then some.

What is a savvy investor to do at this point? While no one knows exactly how a particular virus will affect security prices, past epidemics may shed some light on the subject. In 2003, over a 38-day trading period during the peak of the SARS virus, the S&P 500 index dropped 12.8%. Similarly, during the height of the Zika virus, stock prices shed 12.9%. In both cases, the market quickly recovered, and went on to hit new highs.

According to Dow Jones Market Data, the S&P 500 posted a gain of 14.59% after the first occurrence of SARS, based on the end of month performance for the index in April, 2003. About twelve months afterwards, the broad-market benchmark was up 20.76% (see attached table):

Epidemic
Month end
6-month % change
12-month % change
HIV/AIDS
June 1981
-0.3%
-16.5%
Pneumonic

plague


September 1994

 


8.2%

 


26.3%

 


SARS
April 2003
14.59%
20.76%
Avian flu
June 2006
11.66%
18.36%
Dengue Fever
September 2006
6.36%
14.29%
Swine flu
April 2009
18.72%
35.96%
Cholera
November 2010
13.95%
5.63%
MERS
May 2013
10.74%
17.96%
Ebola
March 2014
5.34%
10.44%
Measles/Rubeola
December 2014
0.20%
-0.73%
Zika
January 2016
12.03%
17.45%
Measles/Rubeola
June 2019
9.82%
N/A%
S&P 500 Index
 
 
 

Let’s go back a bit further. The 1918 Spanish Flu affected nearly half of the world’s population. With a mortality rate of somewhere between 2.5–5%, it’s estimated to have killed as many as 100 million people. How did the stock market react to the worst pandemic of the 20th century? From peak to trough, the market dropped 10.9%, then went on to stage a solid recovery, as the chart below illustrates.

Seeking Alpha

According to Worldometer, which aggregates statistics from health agencies across the world, total active cases peaked on February 17 at 58,747 and have been declining since then. Even with the recent cases reported in Italy, Iran, and South Korea, total active cases now stand at 49,923, a drop of 15% from mid-February.

While history is not a roadmap for the future, if the market follows a similar path as it did during the SARS and Zika virus outbreak, the Dow would fall another 1,350 points, and the S&P would drop about 150 point. Will history repeat itself? Time will tell.

Back to the original question: what’s a savvy investor to do? Assuming one has an appropriate allocation of stocks and bonds, a proper cash reserve (3–6 months’), and a reasonable time horizon, unless this time is different (the four most dangerous words in investing), the smart money stays the course, knowing it will likely get a bit worse before it gets better—but it will get better, and probably sooner rather than later. As Warren Buffett wisely said, “We don’t have to be smarter than the rest; we have to be more disciplined than the rest.”

 

Mark Lazar, MBA
Certified Financial Planner®
www.pathwaytoprosperity.com