Stock markets have tumbled over the past few days and many observers have blamed the Coronavirus for the selling. The S&P 500 is down -8% from 2/19 to 2/26 with other equity indices experiencing similar movements¹. News outlets are filled with reports of the Coronavirus and its potential impact on the global economy and stock markets. How should investors with a long-term horizon respond?

With thousands dead and hundreds of new cases identified every day² the human impact of the is tragic and we do not want to downplay the serious threat of coronavirus. It is possible that the virus could spread across the globe in a worst-case scenario. The CDC advised Americans on February 26th to expect that the Coronavirus to develop into a pandemic.³ In our role as investment advisors we focus on the potential economic and investment implications of the outbreak. For now, the virus’ macroeconomic impact is small but we believe it is likely it could dampen global growth over time. As companies curtail operations in China, quarantines keep workers and consumers restrained, and businesses face low demand it is likely that there will be an economic impact in affected areas.⁴ We anticipate this impact would be a reduction of global GDP by 0.25% to 0.50%. As one strategist said “it is one thing if Wuhan is on lockdown, another if all of Asia is on lockdown, and another if the whole world is on lockdown.”⁵

While the fear of a virus outbreak can be particularly troubling, economic disruptions and stock market volatility are a normal part of the global economy and markets. Indeed, stock markets regularly swoon over various fears. For example, in 2012 investor’s concerns over the possible default of Eurozone country debt sent global equity markets down more than 20% in a few short months.⁶ More recently equity markets declined unexpectedly in the fourth quarter of 2018 on concerns over rising interest rates.⁷ The S&P 500 and Dow plunged 13.97% and 11.8% in Q4 2018, respectively. These are just two examples of the types of concerns and market fluctuations that are always present in modern investing.

Many investors are not aware that market pullbacks of 10 percent or more in a given year are incredibly common and often resolve quickly.⁸ According to research done by Guggenehim Investments, pullbacks (or declines of 5 to 10 percent) occur every nine months. Market declines of 10-20 percent or more occur every two years. For declines of 5-10 percent the average length of the decline was one month and the average time to recover was one month.⁹ Based on these statistics, if an investor sells stocks after they have declined by 5-10 percent and waits until they recover they will lock in losses and miss the quick recovery.

We look to history to help inform our thinking on the potential impact of the disease for investors. We will limit our analysis to the impact of outbreaks on stock markets. There have been multiple, serious outbreaks in the past and their impact on global economies and markets has been mixed. A pandemic is defined as an epidemic that has spread over countries or continents and usually affecting a large number of people.¹⁰ History suggests that influenza pandemics have occurred during at least the last four centuries.¹¹ Since 1900 three flu outbreaks – in 1918, 1957, and 1968 – were labeled as pandemics. Three flu outbreaks threatened to become pandemics but did not become global. These took place in 1976 (swine flu), 1977 (Russian Flu), and 1997 (Avian Flu). Controls such as quarantine, inoculation, and limits on travel helped to contain these outbreaks.

While investors do react to epidemics and pandemics, other issues affect markets and it can be difficult to discern what impact an outbreak had on investors when compared with those other factors.¹² The most significant outbreak in the 20th century was the Spanish Influenza pandemic of 1918. It is estimated that approximately 20 to 40 percent of the worldwide population became ill (estimated at 500 million people) and it is estimated that over 50 million people died.¹³ Stock market returns for 1918 are hard to obtain and would have been affected by the end of the First World War, which took place from 1914 to 1918. The S&P 500 Index can be tracked back to 1871. It fell by 24.7% in 1918 and rose by 8.9% in 1919.

The 1957 Asian flu pandemic is estimated to have caused one million to two million deaths worldwide and is considered the least severe of the three major flu pandemics in the 20th century.¹⁴ The pandemic virus was quickly identified due to advances in science and technology. A vaccine was available in limited supply by August 1957. The S&P 500 index rose by 24% in 1957 and 2.9% in 1958.

In 1968 the Hong Kong flu virus was identified and became a pandemic that lasted until 1969-1970.¹⁵ It is estimated to have caused one million to four million deaths.¹⁶ The S&P 500 index rose by 12.5% in 1968 and by 7.4% in 1969.

Finally, SARS, a coronavirus similar to the current virus, was first reported in February 2003 and was considered contained by July of that year.¹⁷ The World Health Organization received reports from 29 countries and regions with 8,096 persons likely infected with 774 deaths. The S&P 500 returned 18% from February 1, 2003 to August 31, 2003 and returned 26% for 2003.¹⁸

The SARS episode shows how advances in science, technology, and health procedures have helped contain outbreaks and limit their impact compared with prior outbreaks. These same tools and procedures are now being used to address the Coronavirus. As mentioned earlier, there have been a number of flu outbreaks that did not become global pandemics due to preventative measures and treatment. At this point it is too early to know how the Coronavirus will develop and what impact it will have.

The survey of historical outbreaks indicates that while investors do react to news of epidemics and pandemics the impact for stock investors during those outbreaks has been mixed but generally positive. Investors react unpredictably to surprises such as outbreaks but market pullbacks of 5-10 percent have reversed within a month on average. These reactions are not unlike reactions to other concerns such as political upheaval or economic concerns. Investors should remember the benefits of focusing on the long-term and the value of diversification in smoothing out poor performance from one asset or region.¹⁹