June 01, 2020
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What past pandemics can teach us about stock market swings

Richard Drew | AP
Richard Drew | AP
Specialist Gregg Maloney watches the screens at his post on the floor of the New York Stock Exchange in New York City in this Jan. 28, 2020, file photo.

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The new coronavirus continues to cause wild gyrations in the stock market, leaving nervous retirees and other investors wondering whether to keep their money in play.

That virus, known as COVID-19, continues to spread quickly. The World Health Organization said Friday it has infected more than 100,000 and killed 3,462 worldwide.

A Maine wealth management company looked at how quickly the Standard & Poor’s 500 index bounced back after previous pandemics and epidemics, and found that historically stocks have rebounded within six months. The S&P 500 is an index of 500 large public companies.

While past rebounds can’t predict what will happen now, Camden National Wealth Management said that the S&P 500 rose 9.27 percent on average after various outbreaks over the past 40 years. Those include SARS, avian flu, swine flu, ebola and zika viruses. Currently, it is down more than 10 percent since the World Health Organization called COVID-19 a crisis on Jan. 30.

“Whether [COVID-19] is more severe than other outbreaks or not, these things ultimately pass,” Stefan Iris, chief investment officer at Camden National, said in an analysis released Monday. “But we’re in for a choppy road for days, weeks or months.”

Still, he recommends that investors not cash out of their stock market positions. He said they should stay put, stay calm and not rush to trade their stocks in for bonds, which are doing well now. In doing so, they will be buying bonds at a higher rate.

“They should look at the long term, whether anything will be different with the company they’ve invested in five to 10 years,” he said.

Iris said the stock market undergoes a correction of 13.8 percent in any given year. What sparks that correction, or rapid change in value, differs. This year it was the coronavirus, he said.

However, the stock market typically bounces back after a correction, and that has happened with earlier outbreaks as well. Within six months of when the swine flu started in early 2009, the S&P 500 rose 18.72 percent, and within one year, it was up 35.96 percent, Iris said, referring to Dow Jones data.

Global stock markets rose 39.96 percent after the start of the swine flu, according to a recent market commentary by Jeffrey Kleintop, senior vice president at Charles Schwab.

The swine flu pandemic, which spread quickly, killed more than 18,000 people worldwide, according to the World Health Organization. But researchers since have said it could have killed 10 times that number.

“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,” Kleintop said. “A short-term dip in stocks tended to be followed by the continuation of the upward trend.”

He said that if COVID-19 spreads similarly to viruses tracked in the past by the World Health Organization, the number of confirmed cases will rise sharply for eight to 10 weeks. Then the infection rate will likely start to taper off into the spring months.

“Travel may return, along with consumer spending, setting up for an economic rebound in the second quarter similar to the timeline for SARS in 2003,” he said.

The sharper the market downturn, the sharper the rebound that may be, he said.

Iris expects the government and Federal Reserve Board to make more moves to counteract COVID-19’s effect on the stock market. The Federal Reserve already cut its key market rate by half a percentage point in early March, and is poised to make another cut at its next meeting in mid-March.

It can take a while for a portfolio to recover from dramatic declines. Iris said that a portfolio that is down 10 percent will require at least an 11 percent rise in the stock market to recover to where it was before the fall. And it isn’t clear how long that could take.

In the meantime, he has some advice for nervous stockholders.

“I don’t recommend watching the markets on a daily basis unless it’s your job,” he said.

 


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