How Epidemics Impact Financial Markets

Though COVID-19 may be novel, the idea of an epidemic affecting financial markets isn’t.

From the Asian flu to the swine flu, several global health events have had significant financial impact. If you examine the history of epidemics over the last 70 years against the backdrop of the U.S. equity market, there are some interesting findings.

Among the observations include 203,000 deaths related to the swine flu between 2009 and 2010 – and yet the market was able to recover during that time. It’s important to note that this also coincided with the March 2009 market bottom of the great recession, and the recovery from this point was swift in part because of the unprecedented intervention by the U.S. government to stimulate the economy.

The main takeaway here is that while the market can quickly move down based on uncertainty from epidemics, it has historically quickly recovered once uncertainty has decreased and the global economy has found its footing.

We don’t know the duration or the extent to which the uncertainty surrounding the COVID-19 coronavirus will affect financial markets. But we do know, at some point, there will be clarity and the fears surrounding the virus will dissipate and markets will react accordingly. Financial markets are incredibly efficient at pricing in news—good or bad—and the reaction can be swift.

For long-term investors, the lesson is clear: Don’t get lured into the false sense that you can predict when to get out and get back into markets. Realize the short-term noise of the markets we are experiencing now, will one day be a thing of the past as we work our way through the uncertainty related to COVID-19.