Economic performance is best symbolized by the wave. Over a sustained period of time, the economy continues to expand towards its crest before declining in value until it bottoms out and hits the trough. Economists knew the decade-long economic expansion after the Great Recession would likely end sometime soon, but no one could have predicted the end would come in the form of the worst pandemic in more than a century.
When the first quarter ended on March 30th, the data was staggering. The Dow finished down 23% for the quarter, its worst since 1987. The S&P 500 similarly finished the first quarter down 20%, its biggest decline since 2008.. As an extremely contagious pathogen, the novel coronavirus has led thousands of small businesses, franchises, and manufacturers to halt operations with no timetable for return.
In stark contrast from the years and months that preceded the pandemic in which unemployment held at a historically low percentage, millions of Americans now find themselves out of work. Data from the Department of Labor indicates that in the last week of March, 6.65 million Americans filed for unemployment, a grim record. According to the federal government, 47 million Americans may lose their jobs before COVID-19 is defeated, a figure that would push the unemployment rate to 32%.
Some like famed JPMorgan Chase CEO Jamie Dimon now predict that a major recession is on the way. In an annual letter to shareholders, the Wall Street legend argued that second quarter GDP may plummet as much as 35%. While the numbers appear grim and the reality of the pandemic even more so, there is historical precedent that may provide a glimmer of hope during this dark time.
What Drives Market Performance?
The study of economics is by nature a social science. At the heart of any economy lies speculation. When panic sets in due to a fear of lost wages, sweeping unemployment, and widespread shortages, the global economy undoubtedly suffers. We can see how the domino effect works. If a large retail company fears it will not be able to make payroll next month, it will begin to lay off workers by the thousands. Without a steady stream of income, workers must now increase their saving rate and only purchase essentials.
As such, companies deemed non-essential cannot sell their goods and must lay off their workers as well. The domino effect continues until millions are affected. At this point, ordinary workers need as much liquidity as they can get their hands on in order to keep the proverbial lights on (rent, mortgage, credit-card payments). A full-on panic sets in as millions start to sell off their positions in the stock market. The result: a Dow Jones Industrial Average that has plummeted 10,000 points in a matter of weeks.
What Can Past Pandemics Unveil About Economic Recovery?
Some financial analysts argue that global markets historically rebound very well in the wake of health crises. In the wake of the first SARS outbreak virus in April of 2003, the S&P recorded a nearly 15% gain the following month and climbed 20% in the following 12 months. Similarly, the S&P stood at least 10% higher after 12 months in the aftermath of every major epidemic in the last 40 years with the exception of HIV/AIDS, and cholera.
Spanish Flu (1917-1918)
Although Spanish Flu infected over 500 million people and killed between 30 and 50 million, the pandemic did not have a long-lasting economic impact. First and foremost, the virus struck during World War 1 in which millions of soldiers and civilians across multiple continents lived in squalid conditions, a perfect breeding ground for the virus.
Even though the Dow Jones bottomed out in December of 1917, a figure that represented a 33% decline from the previous year, the Dow started a 50% climb soon after. Whether spurred on by the end of the war or the weakening of the virus, the economy not only remained intact, but grew stronger than ever.
HIV/AIDS (1918-Present Day)
Even though HIV/AIDS still remains a sizable fear in much of the third-world, the virus had little to no economic impact in the U.S. When researchers discovered that the virus was spread through bodily fluids, they realized an outbreak could be imminent. Over a 12-month period, the economy remained steady, even in the wake of thousands of deaths. The AIDS virus has now claimed the lives of over 37 million people.
The SARS epidemic that emerged at the end of 2002 in China contains many eerie similarities. The respiratory virus originated in a Chinese wet-market before spreading out across China and several asian countries. Unlike SARS, COVID-19 has proven to be much more contagious.
Although fear spread faster than the virus, the total number of infected (8,098) and deaths (774) pales in comparison to COVID-19. Additionally, the virus struck at a time of economic expansion in the U.S in which from 2001-2007, the economy grew at an average annual rate of 3.9%. In 12-months since the first case of SARS was reported, the S&P actually grew over 20%.
Swine Flu (2009)
The statistics on Swine Flu are shocking. In the spring and summer of 2009, Swine Flu infected 24% of the global population, killing an estimated 284,000. Although the virus was wide-reaching, the global economy did not seem to notice. At a time when the economy was mired in its worst slump since the Great Depression due to the Mortgage Crisis of 2008, Swine Flu had zero impact. In fact, 12-months after the first detection of swine flu in Mexico, the S&P was up 36%.
When Ebola began to spread in West Africa in the fall of 2014, the global community understably feared a cataclysmic pandemic. Classified as a hemorrhagic fever, Ebola attacks every organ in the body, causing massive internal bleeding until the victim dies. Due to its severity, Ebola typically has a mortality rate of 50%.
When the virus was finally curtailed through a united effort by the global community, 28,000 Africans were infected and over 11,000 perished. As tragic as the Ebola outbreak of 2014 was, the virus had little to no effect on the American economy. Only nine Americans contracted the virus, two of which perished. 12-months after the first case was reported, the S&P was up over 10%.
When Will The Economy Recover From COVID-19?
In order for there to be a complete recovery from COVID-19, consumers must have confidence in the market. Without a total eradication of the virus, this may not be possible. As health experts including Dr. Anthony Fauci have stated, COVID-19 may return when the weather gets colder.
A report from the large compliance firm McKinsey predicts the world economy may not fully recover until 2023. Yet, even as the U.S. remains the epicenter of COVID-19, New York has already reported a two-day flattening of its curve, something that many predicted would not happen for weeks. The future may look as bleak as it did in 1918, but keep in mind where the market finished that year.