(Bloomberg) -- Reports of a respiratory virus spreading from China to the U.S. sent investors looking to prior health scares for guidance on how much market fallout to brace for.
As stocks wobbled around the world after the virus was blamed for six deaths in China and a case was confirmed in the U.S., traders looked back at past outbreaks, from Severe Acute Respiratory Syndrome (SARS) 17 years ago to the Ebola scare in 2014. Those cases hint that even when the human toll risks becoming grim, financial markets have shown resilience.
Of course, predictions are fraught with peril when trying to map something whose economic consequences are as nebulous as a health scare. Other factors, including today’s high valuations, could easily exacerbate reactions. Outbreaks don’t occur in isolation, either. The SARS epidemic came when equities were bottoming after the dot-com bubble burst.
Still, it’s useful to look at how markets behaved during past episodes, Michael Shaoul, chief executive officer at Marketfield Asset Management LLC, wrote to clients.
“Despite the sharp initial reaction to the outbreak of the new virus its impact on local Asian markets is likely to be short lived, even if it proves to be as serious and poorly handled as the SARS outbreak,” he said. “The ultimate direction of these markets still looks likely to be determined by local monetary and fiscal policy.”
So far, the market impact has largely been contained to Asia and multinationals that sell into the region. Shares of European luxury-goods companies slid, following declines in Asian consumer and tourism-related firms. Some drug developers and makers of masks and protective gear soared.
In the U.S., the S&P 500 opened lower after the three-day weekend, with investors on edge. Airlines led declines in transportation shares, while makers of luxury goods items that sell in China also struggled. The index rebounded in midday trading, before falling to session lows when the U.S. Centers for Disease Control confirmed the first case of the virus had been confirmed in Washington state.
A 2006 study conducted by Fidelity International on the effects of epidemics in stock markets found that investors typically do react, although it’s hard to strip out the health scare’s effect. And while past episodes may have added to volatility, they did little to change the upward course.
For example, the avian flu epidemic that spread in 1997 coincided with the Asian financial crisis and came just before Russian debt default and collapse of Long-Term Capital Management. Still, the S&P 500 gained 31% in 1997, and posted double-digit gains in the two years that followed.
In 2003, when SARS began to infect thousands across the Asia Pacific region, the MSCI Pacific ex Japan Index dropped 13% at the start of the year, only to end higher by more than 40%, Fidelity highlighted. In the U.S., the S&P 500 dropped as much as 4.6% from June to August, before climbing to finish the year up 26%.
“We cannot draw any fixed conclusions about the effects of pandemics upon stock-market performance,” the Fidelity analysts wrote. “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. In investment terms, it is hard to mitigate the effects of events such as pandemics or war.”
Since the 2006 study, investors have had to contend with the likes of swine flu and Ebola. The S&P 500 posted a handful of down days in April 2009 as U.S health officials confirmed the first death from swine flu, though the benchmark advanced 9.4% that month. Concerns over Ebola stirred in Oct. 2014, although the gauge went on to gain more than 4% in the fourth quarter that year.
Markets are proceeding with caution, particularly after an eye-popping run across equities.
“From an investment standpoint, the risk with any virus is in the scope of its economic impact,” said Alec Young managing director of global markets research at FTSE Russell. “Of course, it’s very early and we want to be careful not to overreact until more facts emerge but, given the global economy’s sluggishness in recent months and overall reliance on the U.S. and China to drive growth, it’s no surprise this issue has investors on edge.”
