Short-term bug or chronic ailment?

A perspective from E*TRADE Securities 02/14/20

Since the World Health Organization (WHO) declared the coronavirus a public health emergency on January 30, confirmed cases in China have topped 60,000 and more than 1,000 people have died. To be sure, those numbers only scratch the surface of the countless families afflicted by the virus, the full impact of which is likely to reverberate for years.

The unfortunate reality is that epidemics like this extend beyond those communities to all parts of the world, including financial markets. And while it's not always easy to discuss the effects on investor portfolios, it is an important, albeit sober, part of prudent financial management.

As the world’s second-largest economy, biggest oil importer, and manufacturing powerhouse, a major blow to China’s economy could in turn weigh on global growth and the US economy. Which may leave investors wondering: As China navigates through the devastation of the outbreak, will there be long-term effects on the stock market? 

Market performance in past epidemics

Many analysts have compared the current situation to past epidemics—especially 2003’s severe acute respiratory syndrome (SARS) outbreak, an illness related to the coronavirus that also originated in China. Over the course of 2003, SARS infected more than 8,000 people worldwide, 774 of whom died.1

While it’s estimated SARS knocked roughly 1% off China’s GDP in 2003, the impact on US equities that year was insignificant (and arguably non-existent). The following chart shows the S&P 500® was up 11.8% three months after the WHO declared the illness a global emergency in March 2003, and extended that gain to 28.7% by year-end.

S&P 500 performance amid 2003 SARS epidemic

Source: Power E*TRADE

The market has weathered other health scares in similar fashion, including the swine flu in 2009 and Ebola in 2014. In both cases, the S&P 500 was higher six and 12 months after the initial reports of the diseases, according to Dow Jones Market Data.2

Why things could be different this time

The big caveat, however, is that China’s economy is now much larger—and more interconnected—than it was 17 years ago.

In 2003, China was the sixth-largest economy. It’s now the second largest, as well as the largest global exporter, second-largest importer, and largest source of international tourism expenditure.3

China's annual GDP vs. share of global GDP

Source: The World Bank, International Monetary Fund

That means a SARS-sized 1% decrease in China’s GDP would now represent a much bigger blow, in absolute terms, to the global economy. The Organization of the Petroleum Exporting Countries (OPEC) has already slashed oil demand forecasts for the first half of 2020, while weighing the decision to cut production amid decreased Chinese demand. Crude oil prices have fallen more than 20% since early January, although analysts are expecting demand to pick up in the second quarter.4

But if the coronavirus outbreak gets significantly worse (it has already surpassed the SARS death toll) it could force China to extend its containment measures, translating into a bigger drag on growth. And that, in turn, could mean more pressure on global equities.

That’s the doom-and-gloom outlook, though.

Keeping it in perspective

Investors should keep in mind we’re still in the relatively early stages of this story, when uncertainty and panic can often exaggerate perceived risks.

Despite a continued stream of scary headlines, many factories in Wuhan—the epicenter of the virus—got back to business on February 10. And while there’s no way to know how long the coronavirus will persist or how many people it will affect, the WHO, as well as US officials, have expressed confidence in China’s ability to contain the outbreak.

Meanwhile, the US economy continues to be on solid footing, with a strong job market and a recent pickup in manufacturing. Some analysts predict that any potential drag on US growth as a result of the virus will be limited and recouped in the second and third quarters of this year.5

Although the market has historically proven its long-term resilience in the face of similar outbreaks, investors shouldn’t assume short-term volatility has run its course. In other words, there may still be a few bumps in the market road under the best of circumstances.

Here are a few things to keep in mind as the coronavirus story continues to play out:

  • Asian-reliant industries could face large disruptions. Companies that rely heavily on the Chinese consumer are expected to be hit especially hard. The energy sector, for example, is now facing falling oil prices and demand. The city of Macau—whose gambling profits totaled about six times that of Las Vegas last year—shut down all 41 casinos in the city for two weeks.6 The luxury goods industry, a market where China has contributed more than half of the growth over the last six years, is also bracing for a major blow. For the most part, though, analysts are cautiously optimistic that losses from retail sales will be limited to the first half of the year and business will bounce back once containment measures ease.7
  • Beaten-down sectors may rebound. Stocks that have taken exceptionally big hits amid news of the outbreak could represent opportunities for bargain hunters. Travel-related businesses, machinery manufacturers, and resort companies were among the first victims of January’s sell-off. In the event the coronavirus does not turn out to be a longer-term pandemic, some of these stocks could be positioned to rebound.
  • It’s still too early to know how the US economy will be affected. While the stock market has seemingly shrugged off concerns, Federal Reserve Chairman Jerome Powell cautioned it’s too early to speculate on whether the US will be materially affected.8 The Fed will be closely monitoring the situation for signs that a weakened Chinese economy is weighing on global growth—which could prompt the bank to reassess its current monetary policy.

In the meantime, investors should remain focused on their individual risk tolerance and long-term goals. This isn’t the first epidemic in market history, and it may offer some comfort to know a well-diversified portfolio has proven to weather most market conditions.


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  1. Centers for Disease Control and Prevention, SARS Basics Fact Sheet,
  2. MarketWatch, “How the stock market has performed during past viral outbreaks, as coronavirus infects 31,000,” February 7, 2020,
  3. CNBC, “5 charts show why the global economy is more vulnerable now than during SARS,” February 4, 2020,
  4. CNBC, “Oil moves higher, despite bearish demand forecasts,” February 12, 2020,
  5. MarketWatch, “Goldman Sachs says impact of coronavirus will be ‘limited,’ and these are the stocks to buy if it’s right,” February 11, 2020,
  6. The New York Times, “Coronavirus Shuts Macau, the World’s Gambling Capital,” February 4, 2020,
  7. Forbes, “Luxury Market Braces For A Major Blow Amid Coronavirus Epidemic,” February 6, 2020,
  8. The Wall Street Journal, “Fed Watching Risks of Broader Coronavirus Disruptions,” February 11, 2020, 

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