Many readers are likely growing concerned about the spread of the coronavirus and the potential impact on the market (and your health). I understand the emotional difficulty of the moment, and I understand the challenges of keeping a cool head amidst the media and market frenzy. Market volatility, accompanied by a blitz of negative news coverage, will make any situation feel totally dire.

In times like these, it often feels like the worst-case scenario is the only possible outcome…even though history consistently implores us not to think this way. It’s not our fault – humans are hard-wired to overreact to the negative while underplaying the positive, which I think describes the current investment environment. Panicking now means giving into this classic investment error, in my view, and is also the precise reason many investors fail to achieve their desired long-term investment outcomes.

Throughout history, there have been dozens of virus outbreaks, epidemics, and a handful of pandemics. Virtually all of them resulted in short-term volatility and downside, followed by long-term price appreciation. In my view, it is very reasonable to expect a wild ride for the next few weeks. But that does not mean the right move now is to sell or panic. Longer-term, the actual impact to the equity markets has almost always been fleeting.

The Virus Cycle: Short-Term Pressure Followed by Longer-Term Recovery

Epidemic 1-month 3-month 6-month
Pneumonic Plague -2.79% -4.67% -4.30%
SARS +8.64% +16.39% +21.51%
Avian Flu -0.18% +2.77% +10.05%
Swine Flu +10.9% +19.73% +39.96%
MERS -0.29% +2.15% +8.58%
Zika -6.05% -0.88% -0.57%
Ebola -0.09% +2.37% +4.37%
Average +1.45% +5.41% +11.37%

Source: Charles Schwab1

A closer look at more recent outbreaks unveils a similar pattern to what we’re seeing today. Historically, the number of confirmed cases in various epidemics has tended to rise sharply for 8 to 10 weeks, then peaked. A short-term dip in stocks generally accompanies the initial (frantic) rise in confirmed cases, with a recovery in prices as the situation comes under control. Over a 38-day trading period during the height of the SARS virus back in 2003, the S&P 500 index fell by -12.8%. During the Zika virus, which occurred at the end of 2015 and into 2016, the market fell by -12.9%. Panic-selling episodes happen, but they have never lasted.

The 1957 Asian flu pandemic was another very significant pandemic in modern history. Advancements in scientific and medical technology allowed the virus to be detected and treated within a year, a time frame we might reasonably expect to be 1-2 months today. The S&P 500 went up +24% in 1957 and 2.9% in 1958.2

Even though it was only 10 years ago, many people forget the scope and gravity of the Swine Flu pandemic. The Centers for Disease Control estimates that from April 12, 2009 to April 10, 2010, there were 60.8 million cases, 274,304 hospitalizations, and 12,469 deaths in the U.S. alone. Globally, the numbers approached 1 billion infected and some 280,000 deaths.3 But as the virus spread and hysteria enveloped the media and the world, the S&P 500 was beginning one of the biggest bull runs of all time. Selling into the Swine Flu pandemic would have been a mistake.

Historically, Selling into Virus Outbreaks Has Been Proven Costly

 Source: Zacks Investment Research4

The Bottom Line for Investors

My goal in this column is not to downplay the seriousness of the coronavirus outbreak. As of this writing, there are over 90,000 confirmed cases and over 3,000 deaths.5 But at the same time, history tells me – as an investor – that that the fear of the virus outbreak will likely far outweigh the actual economic and market impact it will have. Selling now, in my opinion, would mean pricing-in a lengthy recession and bear market—neither of which seem likely.

In my view, selling into virus outbreaks has proven costly throughout history because the stock market’s value is not based on what happens in the next quarter or two. Equity value is based on longer-term corporate earnings generation, which is driven by interest rates, inflation, business investment, innovation, and the regulatory environment. I think these macro conditions are still conducive to growth, even as the virus spreads.

Disclosure

1 Listed returns are for the MSCI World Index, price returns. Past performance is no guarantee of future results.
Charles Schwab, February 24, 2020. https://www.schwab.com/resource-center/insights/content/market-volatility

2 Fidelity, April 6, 2019.

3 Centers for Disease Control and Prevention, June 11, 2019. https://www.cdc.gov/flu/pandemic-resources/2009-h1n1-pandemic.html

4 Zacks Investment Research

5 The World Health Organization, March 3, 2020. https://www.who.int/emergencies/diseases/novel-coronavirus-2019/situation-reports/

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