How markets recovered after pandemics

How have investors responded to the coronavirus?

Let us briefly recall how the situation developed. The first cases of the disease in China became known on December 31, 2019. By January 20, there were reports that the virus was spreading from person to person. From that moment on, stock markets began to react to news about the virus, and the indices slightly declined by the end of the month.

Markets resumed their growth in February, with positive news about the situation in China briefly reassuring investors. By the end of February, the virus began to spread rapidly outside the PRC. On Monday, February 24, global stock markets began to fall due to news of the rise in cases over the weekend. The S&P 500 fell 3.35% on the day, and in Europe the trading day closed with its worst performance in three years. The Stoxx Europe 600 Index fell 3.8% on the day.

Later, a wave of quarantines was introduced throughout Europe and the markets continued to fall, and investors actively reacted to the news. Such volatility in the markets as in the period from February 24 to March 24 has never been seen in history.

By March 23, the S&P 500 index reached a three-year low of 2237 points. The fall for the month was about 33%. After the announcement of measures to support the economy from governments and central banks in different countries, the markets went up. So, from March 23 to March 26, the S&P 500 index rose by 18%. By July 21, 2020, the market had won back about 90% of the fall.

What happened to the markets in the case of past epidemics

The most massive pandemic in history was the Spanish flu epidemic of 1918-1919: about 500 million people fell ill. The impact of the epidemic on the economy and financial markets is difficult to separate from the significance of the First World War, which was then raging in Europe. A significant part of the production on the continent was stopped, international trade chains were destroyed.

The US economy also felt the effects of the war and the epidemic: many businesses, especially in the service and entertainment sectors, suffered losses. The index of the largest American companies, the S&P 500 in 1918, fell 24.8%. But the Dow Jones Industrial Average rose 10.5% that year, despite two waves of the epidemic, including the deadliest in October 1918. The growth may be due to the fact that investors have already taken into account the risks of the war (in 1917, the Dow Jones index fell by 21.7%). It is believed that the virus was completely overcome by February 1919, during that year the Dow Jones index rose by 30.5% - the ninth highest in history. Interestingly, the index of British companies rose 25.4% in 1918 and 27% in 1919.

Two subsequent pandemics - "Asian flu" (1957-1958) and "Hong Kong flu" (1968-1969) also had a weak effect on the stock markets. Despite a sharp drop in the acute phase of the epidemic (for example, from July 1968 to the end of 1969, the Dow Jones fell by about 13%), the markets recovered fully within one to two years.

Researchers believe that the impact of epidemics on financial markets should be considered together with other events in the world. So, the swine flu epidemic of 2009-2010. came immediately after the global financial crisis, when stocks were undervalued. Therefore, the markets grew despite the epidemic. So, from March 2009 to August 2010, when the epidemic ended, the Dow Jones rose 40%.

Why are markets responding more strongly to coronavirus?

In 2020, information is spreading much faster than a hundred years ago during the Spanish flu. Any news (for example, the creation of a vaccine or the beginning of a second wave) can instantly affect the market, the researchers cite one possible explanation.

In addition, compared to all previous pandemics, the global economy has become more interconnected, and the authorities of almost all countries, unlike before, have introduced quarantine measures. Because of this, the coronavirus has wreaked havoc on industries that have grown rapidly in recent decades: air travel, tourism and service businesses.

Experts point out that it is difficult to predict the behavior of investors in conditions of uncertainty. However, as history shows, markets are always recovering, so if you invest for the long term, even global epidemics have no impact.