Past Viral Outbreaks and the Share Markets Reaction

Surprise market crash

It’s a tough time to be an aggressive investor- that’s for sure. Covid-19 has turned the volatility level in the share markets up to 11 with share prices dropping almost universally. Many investors are running for the exits as countries suspend air travel and go into lockdown.

I didn’t want to write about Covid-19 and the market crash. There is already so much much information out there to digest. But here we are anyway. It seems to me that Covid-19 will be with us for a while. Since I’m investing with a 20+ year investment horizon nothings changed much for me in terms of my investments.

That being said, I still find the whole situation concerning- not necessarily financially, although I don’t like to see my investments dropping, but I’m more concerned about how bad it could all get if we fail to contain the spread in terms of fatalities. There is an only previous pandemic that I know of which has been as widely spread as Covid-19, and that is the Spanish flu. And the Spanish flu killed more people than both world war one and two combined. That’s what’s concerning me.

That said, I thought it would be interesting to have a look at previous outbreaks and their effect on the share market and how this one compares. But remember- this is only for our interest and shouldn’t be used as any type of indicator to make any decisions on what to do with our investments.

Past Epidemics and the Share Market

An article about how the world share market reacted after precious outbreaks have been making the rounds on social media- including on the Kiwi Mustachian Facebook page. It suggests that the market’s reaction to many of the previous epidemics are fast-moving and often short-lived. Ultimately, the market almost always recovered in six months post these epidemics previously.

I can’t say for sure, but I think this one might be a little different. Just take a look at the past epidemics and pandemics and their effect on the NZX50 below. The world markets have a similar trend.

Source- Yahoo Finance

You can see that previous outbreaks have had little effect on the local market. Whereas the effect of Covid-19 is very clear. The main reason for this I think is that all the past outbreaks have been localised to a few countries whereas this is truly global.

Take a look at the past epidemics and their effect on the return of the NZX50.

Source- Yahoo Finance

What do local pundits think?

A deep recession, but hopefully short– Dominick Stephens from Westpack.

He goes on to say “We expect economic activity will shrink 3.1% over the coming few months, which is more than the decline over the whole of the GFC. However, we expect the coming recession will be briefer. We expect unemployment will rise to 5.5%. Keeping this downturn orderly requires the financial system to remain stable, which is why we expect the Reserve Bank will start Quantitative Easing and a Term Auction Facility as soon as next week.”

Have a look at the overlay of the NZX50 during the GFC and Covid 19 below.

Source- Yahoo Finance

But they do expect that this will be much shorter than the GFC. And expect a rapid rebound in activity once Covid-19 is under control. It will, however, take several years for things to go back to where they were a few months ago.

The housing market is expected to slow and fall a few percent- but once Covid has passed the fundamentals of the housing market are the same and the growth will likely continue.

Summary

Covid-19 is definitely having a large impact on the share markets- and this is for one reason. Covid-19 is truly a global outbreak that we haven’t seen since the Spanish flu. Many of the recent epidemics have been localised to several countries. This could be a longer downturn and will probably take a while to recover.

Ultimately- the spread and severity of the virus in the next few months will dictate how low and long this dip will be. And I wouldn’t encourage you to try to find a bottom and dumping all their money at once into the share market with the idea that you are buying shares on sale. But rather to just keep on making consistent investments each week into the market.

The thing about trying to find the bottom is that by definition only one investor will ever find the bottom. Those odds are pretty low.

And if you stop investing now- your not dollar-cost averaging into the market- rather you’re effectively timing the market, and you’ve chosen to invest only when prices were high.

My advice is to stop checking your investments. It doesn’t help you in any way right now. If you had a solid investment plan allocated to your risk tolerance and a long term investment horizon, have your emergency fund in place to cover you for a few months you should be able to sit tight and ride it out.

It might not feel like it now, but Covid-19 will go away. It’s a terrible crisis right now, but it will pass.

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