Will the Coronavirus Outbreak Lead to a Market Breakdown?

Key Points

  • While it is impossible to predict the extent a virus can spread and have greater consequences than past epidemics, history indicates that the global economy and markets have been relatively immune to the effects of past epidemics.

  • A key reason is that global health organizations are prepared for outbreaks and effective when mobilized. Combining these efforts with widespread public awareness and adoption of effective safety measures eventually limits the spread of the virus and its economic impact.

  • Individuals travelling to Asia may be wise to take some precautions against contracting the coronavirus, but investors may have little need to take action if their portfolios are diversified and aligned with their long-term plan.

The markets are reacting to daily updates on the spread of the nCov2019 virus, yet it may take a couple of months to begin to assess the actual impact. While the cost is likely to be in the tens of billions from the preventative measures alone, developments over the next few weeks may provide data needed to assess the full toll on the economy and markets.

A long history

While there is always the chance that the next outbreak could have greater consequences, the global economy and markets have been relatively immune to the effects of past viral epidemics—even when the global economy was especially vulnerable to a shock. A short-term dip in stocks tended to be followed by the continuation of the upward trend.

Immune: world epidemics and global stock market performance

Note: MSCI World Index scale is reflected in the left vertical axis.

Source: Charles Schwab, Factset data as of 1/21/2020. Past performance is no guarantee of future results.

A look at three recent examples:

  • In early 2003, SARS only briefly added to the pressures on global stock markets at a time when the global economy was emerging from recession and wary over the invasion of Iraq. The impact was felt most acutely in Asia, where the outbreak was most concentrated. Airlines were also affected as travel declined. The World Bank estimated SARS reduced global GDP by $33 billion. That may seem like a lot, but for perspective the seasonal flu costs an annual $10 billion in lost output just in the United States, according to the Department of Health and Human Services.
  • In June 2006, as the Federal Reserve hiked rates for the 17th meeting in a row, Avian flu (H5N1) garnered much attention. Polls at the time found that one-third to one-half of respondents were at least somewhat concerned about an Avian flu outbreak in the United States. As human-to-human transmission of the lethal virus was confirmed, the outbreak had a short-term effect on the markets, but stocks continued to climb to all-time highs later in the year as those concerns faded.