As equity markets edge back toward pre-COVID-19 levels, I find myself alternating between surprise, relief, and worry. On the one hand, markets are forward-looking. And even as we struggle to contain the virus, it seems certain we will eventually. On the other hand, we’re not out of the woods yet—and there could very well be many parts of economic life that don’t bounce back to their pre-pandemic state. This compelled me to look at the market during the 1918 flu pandemic era to see if it provides any insight for what may lie ahead in the wake of COVID-19.
This flu surfaced in early 1918, compounding the misery of World War I’s final stages. It subjected the world to multiple waves of infection—and tragically claimed the lives of roughly 50 million people in the process—before subsiding in the spring of 1919. Given the destructive nature of the flu pandemic, it’s surprising how well the US stock market performed during this period—at least based on the somewhat scant information available. It appears that the Dow Jones Industrial Average (DJIA) held steady over the course of 1918 before sharply increasing in 1919. While the S&P 500® as we know it today wasn’t created until 1926, stock market data from the Cowles Commission and Robert Shiller's online data show a similar story: Most stocks held steady or rose throughout the 1918 flu pandemic.
As students of long time series know, one should always think carefully before extrapolating market conditions between different periods—especially when there are so many differences between life in 1918 and in 2020. From the threat of war to the changing demographics to the availability of medical knowledge and technology, today’s world is profoundly differently than it was a century ago—as are the viruses that caused both pandemics. However, if we examine US stock market data from the 1957 and 1968 pandemics, we also see a similarly mild stock market reaction. These pandemics each claimed around 1 million lives. The 1957 outbreak is thought to have begun in the winter of 1957 and subsided by the spring of 1958. The 1968 outbreak was initially detected in the summer of 1968 and peaked in the US by the end of the year (although many other countries experienced a sizable second wave between 1969 and 1970).
In the chart below we plot the change in value of the DJIA relative to the estimated start of each pandemic over the course of the subsequent 325 trading days. We’ve also marked the estimated peak US death rate for each pandemic. Each has a slightly different pattern, but none of the historical periods saw market declines of more than 10%. In fact, the market chart for the COVID-19 pandemic is remarkable not for how quickly stocks bounced back but for how deeply they initially sold off. These observations remain unchanged when using S&P 500® data for the more recent periods.
Dow Jones Industrial Average (DJIA) amid pandemics in 1918, 1957, 1968, and 2020
Sources: MeasuringWorth, Centers for Disease Control and Prevention, College of Physicians of Philadelphia, National Center for Biotechnology Information, US National Library of Medicine, 2020.
If musings on the state of the US stock market during periods of pandemic seem too anecdotal and US-centric to be convincing, it’s worth noting that Dimson, Marsh, and Staunton’s annual global survey doesn’t include any of the pandemics we’ve discussed thus far on their list of the six worst episodes of real equity returns in the last century.
The stock market isn’t the economy—and I certainly don’t want to imply that the stock market’s rebound during the pandemic means there aren’t serious consequences for the economy and human lives. And we may continue to see more long-lasting shifts in economic behavior—even after the worst of the virus passes—that will ripple through the stock market. These shifts could benefit some sectors and hurt others. But for the narrow issue of whether we should be surprised if stocks shrug off the ills of COVID-19, it appears this could be par for the course.