Just How Badly Can the Coronavirus Mess Up the Stock Market?

This article was originally published on OfDollarsAndData.com

Global stock markets plunged this week as the coronavirus outbreak continued to spread, stoking fears of global pandemic and an economic slowdown.

While we can’t predict the future, we can try to learn from the past. For example, if we look at how markets performed during prior epidemics — like Ebola, SARS, and swine flu — what do we see? Of course, this will never prove that the market reacted solely because of the epidemic, but it may provide a clearer picture than what prior analyses have shown.


To start, let’s look at the West Africa Ebola epidemic in 2014. Below is a chart of the total number of Ebola cases in West Africa over time, except the “Pre-Peak” period is colored red (to represent uncertainty/fear) and the “Post-Peak” period is colored green (to represent recovery):

Of course, in real time no one would know that the peak was the peak (this is the privilege of knowledge), but let’s assume that people had some understanding that things were improving.

If we use this framework, we can then ask: How did returns look over the next week as Ebola was peaking and immediately after that peak? The following plot shows the S&P 500 against the number of Ebola cases (with the same pre- and post-peak coloring):

As mentioned earlier, markets dipped right before the Ebola peak, but then quickly reversed. In this instance, the market impact was only temporary.


We can use this same framework to ask how SARS affected global equity markets. This is a plot of worldwide SARS cases from the World Health Organization with the pre- and post-peak coloring as mentioned previously:

And then here’s how the S&P 500 performed as SARS peaked:

In this case, the early onset of SARS cases coincided with a 10% market decline over the course of three months. However, this decline started to reverse before SARS even finished peaking.

If you look the MSCI Emerging Markets (EM) index over this time period, you see a similar story:

Like Ebola, the sell-off in markets related to SARS were reversed in a short time period and recovery ensued.

Swine flu

The last modern epidemic we will examine is the 2009 swine flu:

Unfortunately, the relationship between swine flu’s peak and world equity markets is the weakest among the modern epidemics:

As you can see, there is a decline immediately after the peak in swine flu cases, but that decline is the smallest we have seen so far, and, also, doesn’t last. Emerging markets reacted in a similar way:

In total, the three modern epidemics we examined (Ebola, SARS, and swine flu) all coincided with minor declines in global equity markets (-5% to -10% range) that quickly recovered.

Therefore, if we assume that coronavirus will be similar in deadliness to Ebola, SARS, or swine flu, then I wouldn’t worry about the long term impact on the stock market.

But, I already know what you’re thinking. What if coronavirus ends up being worse than these modern epidemics?

One of the arguments for why markets crash during viral outbreaks is that market participants are anticipating worsening results. If coronavirus presented more of an existential crisis to humanity, wouldn’t markets have to fall further as a result?

Unfortunately, given the limited number of epidemics we have seen in modern times, we don’t have lots of data to go on. But, we do have one pandemic that fits the bill. Enter the Spanish flu.

The Spanish flu

Unlike the other epidemics on this list, the Spanish flu was a global killer. Between 1918 and 1920, it infected over 500 million people (~27% of Earth’s population) and killed over 50 million of them.

It’s hard to imagine this many people dying considering that Ebola and Swine flu killed about 12,000 people each and SARS killed fewer than 1,000 individuals.

This chart shows Spanish flu per-capita deaths in the U.K. while the virus was active:

Overlaying this same coloring with the Dow during this time period, we can see that the market sold off about 10% shortly after the peak:

However, unlike the modern epidemics, the market stayed depressed for a few months post-peak.

This suggests that market participants thought that things could get worse. It is also possible that these depressed prices had nothing to do with the Spanish flu whatsoever. We can’t know with certainty.

But think about what this tells us: A global pandemic that killed 3% of the Earth’s population only sent markets down 10% over a period of four months.

This is a stunning result. The worst virus since the bubonic plague and markets go through a run-of-the-mill decline? I would not have guessed that beforehand.

And it is unlikely that coronavirus will be anywhere near as catastrophic as the Spanish flu because of our greatly improved medical knowledge over the past century. However, this does not imply that the economic costs will be lower.

If anything, the economic costs of coronavirus are likely to be higher than prior epidemics as we take larger preventive measures to stop the virus from spreading. Cancelling tens of thousands of flights to the most populous country on Earth is just one example of this.

We can speculate on this in every way we want, but no one knows what will happen. If history is any guide, coronavirus is likely to cause a small, but temporary pullback as it continues to spread.

But once things begin to improve, the market is likely to get out of its funk and recover its losses. Another financial crisis will be averted and humanity will march on.