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The coronavirus outbreak has ensnared Wuhan province in China and captured the world’s attention since the turn of the New Year. With cases spreading in communities in China and several countries, governments are scrambling to protect populations and ensure infectious agent preparedness across large areas. The stability of global markets is a major concern of government officials and investment professionals. Investors are reeling as markets drop, but data suggests that an outbreak’s effects on the American market may be more short-lived than most believe. How will this outbreak affect investor confidence in the S&P 500? Data taken from the S&P 500 shows that in the last 40 years, markets have recovered well from pandemic scares.

In studying pandemics, we can analyze three major viral outbreaks since 1980. One is HIV, the second is SARS, and the third is swine flu. This data is visualized in the chart below (see Fig. 1A).

The S&P dropped -0.3% in the 6 months following the 1981 HIV panic and -16.5% in the 12 months afterwards.

The S&P grew 14.53% in the 6 months following the SARS epidemic and 20.76% in the 12 months after.

The S&P grew 18.72% in the 6 months following the swine flu epidemic and 35% in the 12 months afterwards.

A chart of S&P 500 performance data in times following epidemics. Source: MarketWatch

Caption: Fig. 1A: The recent viral outbreaks since 1981 in a table, with the resulting outcomes of the S&P included.

These three epidemic studies show that the market can be resilient in response to pandemic scares and show recovery in the following year. The exception displayed is the HIV/AIDS epidemic, and even then, the S&P 500 broke-even from its June 1981 month end price 16 months later in October 1982. From that point, the S&P 500 began its 5 year bull run.1 Of the three epidemics considered, two saw positive market growth and only one saw market shrinkage twelve months later. The commotion which global news coverage creates can send shivers through a market as well as the public psyche. Now, as global news covers market response to the coronavirus, the contagion effect of fear and uncertainty pushes the markets towards correction. With that being said, there is a case for optimism in the data from past pandemic scares on the market. While news outlets cultivate disruptive headlines during times of great uncertainty, the economic data from domestic markets trends towards stability following pandemic fears. While contagion of both types is liable to stir up havoc, one can take comfort in data that the market has the capacity for resilience in extenuating circumstances.

1 MarketWatch