Wondering how does the stock market perform during a coronavirus pandemic? Let's go through the -32% crash in March 2020 and the subsequent rebound to all-time highest by 2Q2021.
When the SARS virus outbreak began in early 2003, I was working in Asian equities at a major investment bank. SARS started in Guangdong province, Southern China and ultimately infected ~8,000 people and killed ~774 people across 26 countries.
Then one day, we stopped hearing about the SARS virus. Asian stock markets stopped going down and began to rebound. The SARS virus had been contained, and all was good in the world again.
Let's take a detailed look at how stock markets perform during a viral pandemic like the coronavirus. We'll see how far they go down and how far they eventually rebound in what time frame.
How Does The Stock Market Perform During A Coronavirus Pandemic?
Let's take a look at how the stock market performed during previous pandemics.
The latest viral pandemic, the coronavirus of 2020 is causing jitters among global markets. The virus has steadily spread and all of China is on lockdown.
When people are afraid of a viral pandemic, they stop traveling, buying goods and services, eating out, going to work and so forth. As a result, corporate profits drop and so do the value of stocks.
Below is a chart that shows the various stock market performances during the SARS, Swine Flu, Ebola, and Zika pandemics.
Average Stock Market Selloff During Pandemic
The data says the average selloff is -4.7% over a 1- 3 month period followed by a 12.3% rebound one month after peak scare and a 23.1% rebound three months after peak scare. In other words, if you can buy stocks over a 1-3 month period when the viral pandemic frenzy is at its highest, chances are high you will make money over a three-month time frame.
COVID-19 looks like an aggressive form of SARS. It is spreading much more aggressively that SARS at a similar stage in time. Is this faster spread because the Wuhan coronavirus is deadlier? Or is it because the world is much quicker to track the spread 18 years later due to technology? I have a feeling that it may be a little bit of both.
COVID-19 Looks More Aggressive Than SARS
Some believe the Wuhan coronavirus is not like SARS. SARS was only transmissible while patients were symptomatic, which made it easy for China to contain. Consequently it fizzled out after a few months. The new Wuhan coronavirus spreads from asymptomatic carriers, so it can’t be contained by quarantined based on fever detection. As a result, infections are rising exponentially and likely to spread beyond China.
The general incubation period for a virus is 7-14 days. This is why a quarantine period is extremely important to help isolate and control the virus from spreading.
If you are considering buying the Hong Kong and China indices, here are some relevant ETFs to choose from: Hong Kong ETFs include EWH, FLHK, ZHOK and China ETFs include FXI, CNYA, MCHI.
S&P 500 Performance During Previous Viral Pandemics
Back in March – April 2003, the S&P 500 didn't correct at all due to SARS. Instead, the S&P 500 kept marching higher until everything came crashing down starting in early 2008.
Take a look at the S&P 500 monthly price chart below during SARS, Avian Flu, Swine Flu, Ebola, and Zika. If you look carefully at the shaded regions, the S&P 500 kept on going up!
The difference between 2003 and 2020 is that in 2003, the U.S. was just recovering from the 2000 dotcom collapse. Valuations were cheap, excess froth was out of the market, and investors were hungry to get back in.
The S&P 500 today has gone through an incredible 10+-year bull-run. Valuations are no longer cheap. As a result, the S&P 500 could easily correct by 10% at any given point in time.
If you are a buyer of the S&P 500 and want to buy more than you normally do, I would leg in with every 2% pullback. Getting back to 3,000 from 3,225 is just a 7% correction. Below is the current and historical Shiller PE ratio which shows rich valuations.
COVID-19 Versus Other Viruses
Although it's still early, below is a great chart that shows how the Wuhan coronavirus stacks up against other major viruses. It's always good to put the latest viral pandemic into perspective and compare the pandemonium with how various stock markets are performing.
Let's see how the stock market perform during various other major viruses.
As you can tell from the chart, so far, the Wuhan coronavirus has a very low fatality rate of 2% compared to the other viruses.
Back In 2020 Data
As of February 3, 2020, the latest data shows there are roughly 17,000 cases and 380 deaths. A Hong Kong University study believes there are more than 76,000 infected individuals in Wuhan alone. Whatever the case may be, the numbers will surely continue upward.
However, so far, it looks like the fatality rate is staying consistently low at around 2%. If and when the fatality rate starts to aggressively jump is when I'd start worrying.
Meanwhile, there have been an estimated 19 million cases of flu, 180,000 hospitalizations and 10,000 deaths in the U.S. this 2020 influenza season so far according to the Centers for Disease Control and Prevention. In a bad year, influenza has killed up to 61,000 in the United States alone.
Therefore, the Wuhan coronavirus numbers thus far are small when compared to those of the latest influenza strain. However, as we ALL know, COVID-19 raged out of control and there are more than 550,000 deaths attributed to COVID-19 in America.
How Prepared Are Countries To A Viral Epidemic
Another thing investors should consider is a country's preparedness for a viral epidemic. Wealthier developed countries are considered much better equipped to deal with an epidemic than are poorer developing countries. See the map of the world below according to the Global Health Security Index.
Although the coronavirus has arrived in America, we should not be too worried that it will develop into a countrywide epidemic that sickens and kills many people.
The fatality rate for residents in developed countries like America, Australia, and Germany might be much lower than 2%. Another way to think about things is that even if you were to contract the Wuhan Coronavirus, you have a 98% chance of living.
Where To Consider Buying Stocks
There are many reasons and ways to buy stocks. Don't just think about buying stocks in your after-tax brokerage account. Instead, consider the following accounts as well:
- Your child's 529 plan for college education
- IRA and Roth IRA for retirement
- 401(k) and Solo 401(k) for retirement
- Various taxable investment accounts
If you haven't maxed our your 401(k), IRA, or 529 plan, perhaps during a viral pandemic when stocks are falling is a great time. After all, you are presumably investing decades into the future.
Consider Also Buying Real Estate
When there is a viral pandemic, real estate becomes an attractive asset class because:
- It is tangible
- It provides utility
- It is defensive
- It is less volatile
- It benefits from asset rotation
- It benefits from lower mortgage rates
Once the COVID-19 virus hit, mortgage rates began to plummet as investors sought the safety of bonds. Real estate is very similar bonds in that it provides a steady income (rent) and attracts capital during uncertainty as well. In fact, real estate tends to outperform stocks with stocks are down.
The easiest way to buy real estate is through a REIT like Vanguard's VNQ, or a speciality REIT like OHI and O. Another easy way to buy real estate is through a real estate crowdfunding platform like Fundrise. I particularly like their specialty eREITs focused on growth, income, and regions. Fundrise is free to sign up and explore.
Another great way to buy real estate if you are an accredited investor is through CrowdStreet. CrowdStreet focuses on commercial real estate in “18-hour cities,” those secondary cities that have lower valuations, high cap rates, and potentially higher growth.
Thanks to the growth of remote work, there is a multi-decade demographic shift towards secondary cities like Austin, Charleston, Salt Lake City, Denver, and more. CrowdStreet is also free to sign up and explore.
Refinance Your Mortgage As Well
If you own existing physical real estate, you should absolutely refinance your mortgage to take advantage of lower mortgage rates. I refinanced my primary residence to a 7/1 ARM at 2.625% for no fees plus a $220 credit. Check out Credible, one of the best lending marketplaces where pre-vetted lenders compete for your business. You can get real quotes in under three minutes to compare and contrast.
Even though a viral pandemic can be scary, your chances of survival are high. Consider taking advantage of stock market overreactions to buy stocks. Definitely refinance your mortgage and diversify into real estate as well. Over the long run, you will probably turn out fine.
Update 2Q2021: Thank goodness the worst is behind COVID-19 with all the vaccines. The housing market for the foreseeable future looks very strong. However, stocks look frothy here. I've been slowly taking profits in stocks and looking at municipal bonds, and alternative assets.