In the spring of 2003, I was invited to visit John Martin, a close friend of mine and a good friend of the Van Tharp Institute. John and his family lived in Singapore, and at that point, the world was on the tail end of the SARS (Severe and Acute Respiratory Syndrome) outbreak. My round trip plane ticket cost about $700 and the wide-body jet from into Hong Kong was less than a quarter full. The SARS news had hit the airline and travel industries hard.
Fast forward to October of 2014. The Ebola crisis, that caused 15 times more deaths than SARS, broke out of the containment of west Africa. Subsequently, the U.S. stock market dropped 7.5% in less than five days. As I’m finishing this article on the morning of Thursday, January 23, the current spread of the Coronavirus has claimed 17 lives.
While the response to contain the virus has been quicker than in past instances, many are still concerned about a market impact from the infectious disease. History tells us that we likely won’t see a significant impact outside of some short-term headline risk.
When people in Wuhan, a city in central China, first started getting sick last December, the Chinese government underplayed it. They said there were no signs that the disease had been transmitted from one human to another, and they quickly ruled out that the illness could be caused by the same virus active in the 2003 SARS outbreak.
That deadly SARS virus spread to more than 8,000 people, killed 774, and sent stocks tumbling across the region. Traders still remember that, so China’s reassurance and the limited scope of the outbreak kept them calm initially.
But this week, news about the outbreak did jar the markets. As recently as last Friday, China was reporting just 62 cases and two deaths. But reports were already coming out about possible cases in Thailand, South Korea, Japan, and the Philippines. By Saturday, the news was starting to add up. China announced that in Wuhan alone, there were 168 cases and four deaths.
So within a few days, the number of cases at the source of the outbreak almost tripled and worse yet, at least 14 of the infected were medical workers who had caught the disease from a patient. In other words, the virus, now confirmed to be a relative of the SARS virus, had been confirmed to spread from person to person. Cases were also officially reported in the three major business centers of Beijing, Shanghai, and Shenzhen.
Markets across Asia tanked on this news that hit Monday evening just after 8 p.m. EST. Here in America, traders followed suit with a quick drop in after-hours index futures trading. By the end of the U.S. trading day on Tuesday, the first air passenger with the virus had hit U.S. soil and I had been on Fox Business Network and Bloomberg radio answering questions about the market impact of the virus. The China large-cap index was down -4.5% by that point.
But since then, despite the heartbreak of more deaths, health organizations around the globe have acted quickly to contain the spread. And so far, the resilient U.S. market has absorbed the news in stride. What can we expect from here? Absent an unexpected turn for the worse in the spread of the coronavirus, history would indicate that there won’t be much market impact.
The Previous Outbreaks: Fast but Short-Lived Moves Down
Back in 2003, the SARS virus had a broad psychological impact, with near-panic conditions spreading across the Asian region and sending economies there into a stall pattern.
For example, Hong Kong’s Hang Seng stock index dropped more than 9% before the outbreak came under control and the index recovered:
This new viral outbreak is already showing some concerning similarities to SARS. For one, the two viruses spread from animals in markets to humans first and then moved to spread through human contact. Also, the Chinese government initially downplayed the importance of both outbreaks. At the beginning of the SARS outbreak, Chinese authorities seriously underplayed the virus for a month. There were documented cases of under-counting in military hospitals, cover-ups, and a ban on foreign experts investigating the outbreak.
The secondary response this time around, fortunately, has been quite different:
- The Chinese government downplaying the news for a far shorter period and has been far more responsive.
- The original source of the outbreak, a live-animal market in Wuhan, was closed and sanitized on January 1.
- Several Asian countries are already investigating possible cases and the U.S. Centers for Disease Control and Prevention will be screening travelers from Wuhan.
- Beyond China, the World Health Organization is holding an emergency meeting tomorrow to coordinate a broader response to this latest outbreak.
But with the virus now spreading person to person, this sickness is still taking a heavy toll.
There is one huge factor exacerbating the containment of the current virus. This coming Saturday marks the Chinese Lunar New Year – the biggest holidays in Asia. Much like Thanksgiving here in the States, the holiday involves many people traveling home to be with their families – but on a much larger scale. In fact, this celebration has been called the largest annual human migration in the world. So later this week, some 100 million people are expected to travel by train, plane, or car to see their loved ones across the region. The holiday travel could speed up the spread of the virus and increase the risk to both people and economies. It will be a very tough stress test for the protective measures put in place to prevent further spread.
While there is a high probability that we’ll see other temporary market blips from unfortunate news about the virus, the longer-term outlook for any market upset from the virus is small. Here is an informative table put together by Dow Jones Market Data:
My main takeaway from this data is this: after the short-term market gyrations are over, the longer-term market effects of disease outbreaks in decades past have been minimal and have been far overshadowed by other market factors.
I will be monitoring news from the Lunar New Year travel but I’m not changing much in my trading outlook other than avoiding travel-related stocks for now.
Great Trading and God bless you,
D.R.