Why the Ebola virus outbreak has stock traders on edge
Insight: It’s worth looking at market reactions to past global health crises
CHAPEL HILL, NC. (MarketWatch) — Is it even possible to be an investment contrarian in the face of the potential threat posed by the Ebola virus?
It seems almost sacrilegious to ask this question in the face of the Ebola victims’ terrible suffering. But this subject is nevertheless on the minds of many, even if they only speak about it sotte voce. And still others are using the stock market’s resilience in the face of the potential threat from Ebola as evidence of investors’ irrational exuberance.
U.S. Ebola patients treated with experimental drug
A second American aid worker infected with Ebola arrived at Emory University in Atlanta for treatment. Both patients there have been treated with an experimental drug to combat the virus. WSJ’s Peter Loftus joins Lee Hawkins on Lunch Break with the details. Photo: AP
So in this column I face this question squarely, on the theory that we do no one any good by acting irrationally in the face of a crisis. So it’s not a bad idea, in advance, to think the unthinkable, so that if — heaven forbid — the Ebola outbreak in Africa spreads to other continents, you will have an idea how you might want to react in your portfolio.
For historical perspective on what a worldwide Ebola outbreak might mean for investors, consider the stock market’s reaction to the great flu pandemic of 1918-1919. I challenge you to look at a chart of the Dow Jones Industrial Average DJIA, +1.01% over that two-year period and deduce that those years encompassed the worst epidemic in recorded history.
According to a Stanford University website, a fifth of the world’s population was infected in that epidemic, and an estimated 20 to 40 million people died of the flu. According to that site, “more people died of influenza in a single year than in four years of the Black Death Bubonic Plague from 1347 to 1351.”
The infection rate was even higher in the U.S., where 28% of the population came down with the disease and 675,000 died — at a time when the U.S. population was less than a third of what it is today. Believe it or not, the Stanford website reports that “the effect of the influenza epidemic was so severe that the average life span in the U.S. was depressed by 10 years.”
And yet, far from crashing, the stock market rose in the wake of the 1918-19 pandemic. Of course, measuring the extent of that rise is not an exact science, since it’s impossible to pinpoint a precise day on which the pandemic began. But September 1918 seems reasonable, since that was the month in which the number of people in the U.S. infected with the virus began to mushroom.
Needless to say, there was a lot going on in 1918 and 1919 besides the flu pandemic, not the least of which was the ending of World War I. So even if we could pinpoint a precise starting point for the pandemic in the U.S, it still wouldn’t be possible to isolate the unique impact of that pandemic on the stock market.
|Gain from 8/31/1918 level||% change in Dow|
|1 month later||+2.2%|
|3 months later||-2.1%|
|6 months later||+2.4%|
|12 months later||+26.4%|
All we can really say with confidence is that a pandemic of such proportions doesn’t guarantee a stock market crash. But isn’t that all a contrarian needs to say in response to those who think the world would come to an end?
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