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The (Fictional) Pandemic Crash Of 2003

Transmission Electron Micrograph (TEM) of Severe Acute Respiratory Syndrome (SARS) virus.
Severe acute respiratory syndrome (SARS) virus particles, in orange, found near the periphery of an infected cell.
Image courtesy the National Institute of Allergy and Infectious Diseases (NIAID).

I was out to dinner one evening last week with a young friend who was very concerned about the impact that the spreading coronavirus outbreak might have on the stock market.

“Do you remember the Great SARS Market Crash of 2003?” I asked.

He shook his head ruefully and admitted that he did not. This is understandable, because he could not have been more than kindergarten age in 2003. It’s also understandable because the Great SARS Market Crash of 2003 never happened.

The illness that came to be known as severe acute respiratory syndrome, or SARS, is believed to have originated in China’s Guangdong Province in November 2002. Like the current illness out of Wuhan, SARS was caused by a coronavirus that first jumped from an animal species to humans and later proved capable of human-to-human transmission. Chinese health authorities hushed up the growing threat at first. But SARS burst into the open in February 2003 when a traveling American took ill during an Asian trip and died in a hospital in Hanoi, Vietnam.

As fears of a global pandemic spread, and as Southeast Asia went into a near lockdown, a promising start to the stock market’s year reversed course. By the end of the first quarter, the S&P 500 index of large U.S.-based stocks had lost about 3.6%, according to data tracked by Yahoo! Finance.

But SARS caused little disruption to the American economy, which was just recovering from the recession that followed the dot-com crash and the 9/11 terrorist attacks. U.S. gross domestic product actually increased by 2.2% in the first quarter of 2003, according to the Federal Reserve Bank of St. Louis. In the second quarter of that year it reached 3.5%, and in the third quarter it was a torrid 7%. The stock market responded with a surge of nearly 15% in the S&P 500 index in the second quarter, en route to an overall gain for the year of more than 26%.

A similar pattern played out in 2009, when the aggressive H1N1 flu strain swept the world. (That was the strain also called “swine flu,” for its previously unknown combination of genetic material from avian, swine and human flu viruses.) Existing flu vaccines were ineffective, and this flu was atypical in the way it was particularly lethal to young adults. People over age 60, who often had prior exposure to earlier H1N1 flu strains, had greater resistance.

In the United States alone, the Centers for Disease Control and Prevention estimated there were more than 60 million flu cases in the 12 months starting in April 2009, resulting in more than a quarter-million hospitalizations and nearly 12,500 deaths. Globally, the CDC estimated there were anywhere from 151,500 to 575,400 deaths that year attributable to the new H1N1 combination. That virus still circulates today, but with most of the global population already exposed, it is now clinically indistinguishable from other flu strains.

The big economic story in 2009 was the incipient recovery from the Great Recession and the accompanying crash in financial markets, which had hit bottom in the early months of that year. The economy contracted by 8.4% in the last quarter of 2008, by another 4.4% in the first quarter of 2009, and by 0.6% in the second quarter. After that, growth returned at rates of 1.5% in the third quarter and 4.5% in the fourth. The stock market anticipated this return to growth after bottoming out in early March 2009. In the second quarter, even as the new flu emerged as a major health concern, the S&P 500 posted a 15.2% return.

As this week began, there were more than 17,000 officially confirmed cases of the new coronavirus. There were somewhat more than 350 deaths – all but one of them in China. (The outlier was a Chinese resident who died in the Philippines.) Clinicians suspect the actual number of cases may be far higher, but nearly all of those suspected cases are in China, too. The great majority so far are in Wuhan and the surrounding Hubei Province, where the disease seems to have originated.

These are still the early days of the emerging epidemic (which has not sufficiently jumped continents to achieve pandemic status, at least so far). Indications are that this pathogen spreads more readily but kills more selectively than some of the renowned pandemics of the past. The granddaddy of all modern global pandemics, the “Spanish flu” of 1918-19, is estimated to have killed 10% of those it infected, and possibly more. Today’s treatments for the pneumonia induced by the emergent coronavirus are certain to keep mortality much lower. So, too, are the aggressive steps that many nations are taking to isolate and contain the new virus. Wuhan and several nearby cities are physically isolated within China. Meanwhile, other nations are increasing travel curbs and closely monitoring travelers with recent exposure to China. These measures mean spread of the disease is apt to at least be limited, if not fully stopped.

This is not to say that the virus will have no impact on regional or global business. China has the world’s second-largest economy and is deeply embedded in the global supply chain. On the first day after the Lunar New Year holiday, the Shanghai Composite Index fell by nearly 8%. The country is looking at one to two more weeks of commercial hibernation, at least, while authorities struggle to bring the situation there under control. The results are going to show up in first quarter GDP statistics in many parts of the globe.

But history teaches that even severe illness outbreaks have little long-term economic consequence, at least not since the discovery that diseases are caused by microorganisms and that there are effective ways to prevent, contain and treat them. Even the greatest pandemic of the 20th century could not override broader macroeconomic factors. After the guns of World War I fell silent in November 1918, and as the Spanish flu began its global carnage, the Dow Jones Industrial Average posted a gain of more than 30% in 1919.

That’s why even though we were not around to remember the Great Market Crash of 1919, all of us know perfectly well that it did not happen until 1929 – long after the time to blame the flu had passed.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us” and Chapter 4, “The Family Business."

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