Time to Read: 4 Minutes

Markets have been reintroduced to volatility after several hundred cases of a deadly new virus were first reported last week in Wuhan, Hubei Province, China. The respiratory illness belongs to family of viruses that contains the common cold as well as SARS and MERS. This week, the number of cases soared into the thousands and infections were confirmed in numerous countries, including the US.

The accelerating spread of the viral outbreak has many investors wondering if they should worry—especially if the World Health Organization deems the situation serious enough to declare a public health emergency of international concern (i.e., a global health emergency). Markets are reflecting these concerns: On January 27th, the Dow Jones Industrial Average posted its fifth consecutive daily decline, the S&P 500 Index notched its first drop of more than 1% since October, and the Cboe Volatility Index (VIX) reached its highest level since October.[1]

While it’s impossible to know what will happen with the fast-moving virus, history can show us how markets typically perform during global health emergencies. Ned Davis Research (NDR) found that, since 1884, such events have not left a major or lasting impact on the market. There is, however, evidence of a “fear” pattern, whereby markets dropped as the uncertainty and newsflow increased around the health emergency.

As shown in the chart above, there have been six official global health emergencies since 2003. On average, the S&P 500 Index was higher 12 months after the emergency declaration, as depicted by the bold blue line.

At BWM Financial, we have been patiently waiting for sentiment to retreat from euphoric levels so that we might have an opening to increase equity exposure, should global growth continue to improve. Stay tuned: This event may offer us such an opportunity.


[1] “Dow Drops Over 450 Points on Coronavirus Fears”, by Karen Langley, The Wall Street Journal, January 27, 2020, https://www.wsj.com/articles/global-stocks-slide-on-coronavirus-fears-11580119666?mod=article_inline

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