How the stock market has performed during past viral outbreaks, as epidemic locks down 16 Chinese cities

China has shut public transport in a number of cities to contain the spread of the coronavirus, according to reports.

  • By Mark Decambre,
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U.S. equity markets have experienced downbeat trade recently as investors keep one eye trained on a deadly flu outbreak in China.

However, gauged by the market’s performance during the onset of other infectious diseases, including SARS, or severe acute respiratory syndrome, Ebola and avian flu, Wall Street investors may have little to 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, many investors are recommending caution amid the current bout of coronavirus that was first identified late last year in Wuhan City, China, and has claimed at least 80 lives, with nearly 3,000 people sickened as of Sunday, according to reports. 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 U.S. shores.

“Risk velocity – the pace at which major risks and ‘black swan’ events can affect asset prices – is elevated in today’s markets compared to 10 years ago for three key reasons,” said Seema Shah, chief strategist at Principal Global Investors, in a research note, referring to the theory for the impact of unexpected events on markets and economies, popularized by Nassim Nicholas Taleb in his book The Black Swan: The Impact of the Highly Improbable.

The strategist said a social-media driven news cycle, the interconnectedness of global supply chains and a pricey stock market, make Wall Street more vulnerable to a black swan.

“External shocks can derail economic trends and abruptly alter market sentiment. Not all risk is economic policy or monetary,” wrote David Kotok, chairman and CIO at money manager Cumberland Advisors, in a recent research note.

On Friday, the Dow Jones Industrial Average (.DJI), the S&P 500 index (.SPX), and the Nasdaq Composite Index (.IXIC), ended the day and week lower and stocks were turning sharply lower early Monday.

Investors lately have been attuned to updates on the spread of the disease, with the first U.S. case reported Tuesday in Seattle, Wash., on Thursday and a fifth in California popping up over the weekend, according the Centers for Disease Control and Prevention.

Historically, however, Wall Street’s reaction to such outbreaks and quickly spreading diseases is often short-lived.

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% (see attached table):

SARS resulted in a total of about 8,100 people being sickened during the 2003 outbreak, with 774 people dying, according to data from WHO and the Centers for Disease Control and Prevention.

Separately, the S&P 500 rose 11.66% in the 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 has gained an average 0.4% in the month after an epidemic, 3.1% in the ensuing six-month period and 8.5% a year later (see graphic below):

The severity of the virus, ultimately, will dictate the market’s reaction and just because indexes had 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.

As of Friday, Beijing had shut down parts of the Great Wall, as well as 16 cities, restricting movement of some 46 million people, and canceling many events related to the Lunar New Year.

“There are concerns that the coronavirus may spread quickly within and beyond China, causing economic and market damage. This is particularly a concern as travel ahead of the Lunar New Year is getting underway,” wrote Jeffrey Kleintop, Charles Schwab’s chief global investment strategist. China also extended the holiday to Feb. 3, to help contain the virus.

The Wall Street Journal reported that the incubation period for the virus is around 14 days, citing health officials. People are most likely not contagious before symptoms develop.

A pandemic couldn’t come at a worse time for China’s sluggish economy, which slowed to 6.1% rate of annual growth last year, according to gross domestic product figures released last Friday, which reflected the lowest reading for Beijing in nearly three decades.

“The upcoming Lunar New Year celebration…could accelerate the virus’s spread as well as its economic impact,” wrote analysts at Wells Fargo Securities, led by Jay Bryson, in a Wednesday report.

Meanwhile, WHO has thus far avoided declaring an international health emergency but was convening to discuss the outbreak again on Monday.

And travel related stocks have taken a hit this week thus far.

Shares of parent Booking Holdings Inc. (BKNG), are down 3.3% on Monday. Expedia Group Inc. shares (EXPE), lost 2.6% and TripAdvisor Inc. shares (TRIP), have declined 2% early Monday.

Airline stocks are also mostly lower, with United Airlines Holdings Inc. (UAL), off 4.4%, those for Delta Air Lines Inc. (DAL), down 4.6% and American Airlines Group Inc. (AAL), has lost 5.6% so far in the session.

Experts emphasize that it is important not to generalize the potential for unexpected results from epidemics on economies and markets.

“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,” according to a 2006 report commissioned by Fidelity Investments and cited by Bloomberg News.

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